It is almost a unanimously accepted view that The Wealth of Nations does not contain a single original idea establishing the fact that Adam Smith borrowed all key ideas from various sources. He believed that he could claim originality for all the important ideas if he concealed their sources. Ferguson exposed Adam Smith for making a false claim related to the pin-factory example. It is intended to continue the process initiated by Ferguson by identifying paragraphs on sources of economic growth, canons of taxation and undesirability of monopolies, the core of The Wealth of Nations , which are textually quite similar to those in The Arthashastra . It is claimed that Adam Smith lifted those ide as from The Arthashastra. It is indicated in the Appendix that more than two hundred years before Adam Smith, Machiavelli also seems to have access to The Arthashastra. Hopefully this process continues until all of Adam Smith’s sources are identified and duly acknowledged.
It is truly astounding that there is almost a consensus that Adam Smith’s The Wealth of Nations does not contain anything that may qualify as original. Adam Smith merely collected materials from various sources. Often he expressed the borrowed material in his own language and also tried to synthesize it although with some inconsistencies.1 Sometimes, he acknowledged his sources, and other times the honorable Dr. concealed them, assuming, perhaps that no one would bother to find that out. That proved to be an unrealistic assumption, particularly when the source was too obvious to be concealed. As an illustration, in emphasizing the importance of division of labor, he used the example of the pin-factory, although he did not acknowledge its source but reproduced it as he had found it in the French Encyclopédie (1755).2
Adam Smith borrowed key ideas both from western and non-western sources, but avoided acknowledging them.3 If his borrowed feathers were returned to the owners, the unearned title of “father of economics” would also fly away with the feathers. Adam Smith personally supervised the burning of his confidential papers to destroy not just his incomplete manuscripts but also evidence related to his sources. Nevertheless, at least in three areas, Adam Smith’s debt to Kautilya is clearly recognizable: 1) identification of land, labor and capital as the sources of economic growth; 2) the four canons of taxation: a) certainty of tax liability, b) tax liability in proportion to benefit (income), c) economy in collection and d) convenience to the tax payer in making payment; and 3) undesirability of monopolies. Section 3 presents paragraphs related to the sources of growth from Kautilya’s Arthashastra and from Adam Smith’s The Wealth of Nations. Paragraphs related to the four canons of taxation are presented in Section 4. Kautilya’s and Adam Smith’s views on the undesirability of monopolies are presented in Section 5. Final section contains some concluding observations. Section 2 briefly presents the respective scopes of The Arthashastra and The Wealth of Nations.
Scope of The Arthashastra: Interestingly, rather than stating the scope of his Arthashastra in the beginning, [
Two things are obvious: first, Kautilya put strengthening and promotion of dharma (ethics) ahead of artha (material well-being) since he believed dharma not only paved the way to bliss but also to prosperity. Secondly, he considered his Arthashastra as a manual on engineering Yogakshema―peaceful enjoyment of prosperity―for all the people. The concept of Yogakshema is much broader and holistic than the currently used concept of human security. Capitalism was emerging and both urbanization and monetization were increasing at the time.4 Keeping those trends in view, Kautilya proposed a judicious mix of visible and invisible hands.
He understood the allocative role of prices.5 He suggested incentives to promote economic growth in the private sector. At that time, Kings used to spend most of the tax revenue on building luxurious palaces and very little on building infrastructure. However, Kautilya (p. 149) suggested, “Hence the king shall be ever active in the management of the economy. The root of wealth is economic activity and lack of it brings material distress. In the absence of fruitful economic activity, both current prosperity and future growth are in danger of destruction. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activity (1.19).” He suggested to build roads, water works, “remove all obstructions to economic activity” and create an ethical environment. He identified a) capital, labor and land as the sources of economic growth, b) suggested incentives to encourage supplies of these inputs, c) devised a tax system, that included not only the principles of taxation and a piecewise linear income tax but also measures for compliance and d) formulated laws that promoted economic efficiency and ethical fabric of the society. He believed that ruler’s ethical conduct, and not institutions, was the “deep determinant” of economic growth. According to him, a king should be a rajarishi, ethical and wise like a sage and create an ethical environment.
Until recently, Kautilya has been the only economist who suggested both preventive and remedial measures to handle systemic risk. He (p. 116) stated, “In the interests of the prosperity of the country, a king should be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state (8.4).” He identified threat of an aggression, occurrence of a famine and moral decay as sources of systemic risk.6
Scope of The Wealth of Nations: [
Then, in Book IV, Adam Smith (Book IV, p. 449) defines, “Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.” One would expect that he would explain, at the minimum, how to bring prosperity. As [
Adam Smith’s invisible hand would be confined only to Case 1 where there is no conflict between the public interest and the private interest. Whereas, Kautilya suggested steps to manage all the cases. Incidentally, both Confucius and Kautilya paid special attention to Case IV. If Adam Smith had borrowed all of Kautilya’s insights or not concealed the sources, other researchers could have benefitted significantly.
As mentioned above, Kautilya had identified Land, Labor and Capital as the sources of economic growth. Assembly-type division of labor, what is now called Fordism, was practiced during fourth century BCE in India and Kautilya did not see the need to mention it.8 The following
Kautilya in emphasizing the contribution of capital wrote “Man, without wealth, does not get it even after a hundred attempts”. Adam Smith expressed that as machines “facilitate and abridge labor, and enable one man to
| Public interest | Against public interest | |
|---|---|---|
| Private interest | Ideal Case I | In private interest but against public interest (conflicts of interest): monopoly, lobbying, financial manipulation, insider trading, regulatory arbitrage, free riding etc. Case III |
| Against private interest | In public interest but against private interest (conflicts of interest): charitable activities, serving the country etc. Case II | Against both public and private interests (worst): actions motivated by the destructive vices, such as excessive greed, anger, lust, jealousy etc. Case IV |
| Sources of economic growth | Kautilya | Adam Smith |
|---|---|---|
| Importance of capital | “Man, without wealth, does not get it even after a hundred attempts. Just as elephants are needed to catch elephants, so does wealth capture more wealth, Wealth will slip away from that childish man who constantly consults the stars. The only [guiding] star of wealth is itself; what can the stars of the sky do? (9.4.26-27).” Kautilya (p. 664) observed, “On the other hand, one fighting with a tiny army perishes like one trying to cross the ocean without a boat (12.1).” | He (p. 11) states that machines “facilitate and abridge labor, and enable one man to do the work of many.” Adam Smith (p. 13, ft. 1): [Examples are given in Lectures, p. 167: “Two men and three horses will do more in a day with the plough than twenty men without it. The miller and his servant will do more with the water mill than a dozen with the hand mill, though it too be a machine.”] |
| Importance of labor | He (p. 619) stated, “The value of land is what man makes of it (7.11).” He (p. 621) added, “A king who trusts in fate and does not believe in human effort will fail because such a king never begins a work and never achieves anything (7.11).” He (p. 685) stated, “It is better to have either an army composed of Kshatriyas trained in the use of weapons or a Vaishya or Sudra army with a large number of men (9.2).” | p. 351: “There is one sort of labor which adds to the value of the subject upon which it is bestowed: there is another which has no effect. The former, as it produces a value, may be called productive; the latter, unproductive.” |
| Importance of land | Kautilya (p. 617) stated, “Among the signatories to a treaty for a joint campaign, he who acquires land [whether settled land or virgin land] with [the maximum number of] ideal qualities and with many developed productive facilities outman oeuvres the others (7.10).” | He (p. 195) states, “The acquisition of new territory, or of new branches of trade, may sometimes raise the profits of stock, and with them the interest of money, even in a country which is fast advancing in the acquisition of riches.” |
| Role of institutions | Kautilya (p. 108) observed, “By maintaining order, the king can preserve what he already has, acquire new possessions, augment his wealth and power, and share the benefits of improvement with those worthy of such gifts. The progress of this world depends on the maintenance of order and the [proper functioning of] government (1.4).” | (Bk. V, Ch. III, p. 445) “Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay.” |
do the work of many”. There is hardly any difference since Adam Smith substituted “hundred” by “many”. However, according to Kautilya, all workers contributed to income, whereas Adam Smith did not think so. We may summarize as follows:
1) Kautilya emphasized the importance of capital to economic growth so did Adam Smith. Both used simple examples to make the point. Industrial revolution was taking hold all around Adam Smith still he used simple examples. It indicates that he spent twelve years in collecting ideas from existing sources rather than shifting the knowledge frontier outwards.
2) Kautilya believed that capital and labor were complements so did Adam Smith.
3) Kautilya believed that use of capital increased labor productivity and saved labor and Adam Smith also believed that. They did not make any distinction between labor-augmenting and labor-saving.
4) Interestingly, Kautilya understood that training was labour-augmenting.
Kautilya emphasized certainty of taxation, proportional income tax, convenience of payment and economy in the collection of taxes. Additionally, Kautilya was concerned about tax evasion. He equated tax evasion to a theft and recommended strict enforcement. Adam Smith appreciated the tax system in India and other countries. He (1776, part II, p. 364) wrote, “The sovereigns of China, those of Bengal while under the Mahometan government, and those of ancient Egypt, are said accordingly to have been extremely attentive to the making and maintaining of good roads and navigable canals, in order to increase, as much as possible, both the quantity and value of every part of the produce of the land, by procuring to every part of it the most extensive market which their own dominions could afford.” The tax system in Bengal and others parts of India was the one recommended by Kautilya.9 It is no surprise, Adam Smith recommended the same canons of taxation. The following
Incidentally, Spengler brings out Kautilya’s additional insights on taxation. [
Kautilya had suggested provision of public goods and regulation of externalities, monopolies and monopsonies by the government. Adam Smith suggested provision of public goods by the government but did not suggest any regulation of externalities and monopolies. However, neither Kautilya nor Adam Smith called them market failures. The following
Kautilya did not use deadweight loss as the argument for the undesirability of monopolies. Instead he had argued that monopoly was undesirable since it oppressed people. Adam Smith also did not argue that monopoly was undesirable because it created a deadweight loss. He, just like Kautilya, argued that monopoly was undesirable because it oppressed people. This is indisputable evidence that Adam Smith had access to Kautilya’s ideas. Interestingly, Kautilya equated charging of high prices through the formation of cartels to theft.
| Kautilya | Adam Smith | |
|---|---|---|
| Benefit-rule of taxation | (p. 820) “When there was no order in society and only the law of the jungle prevailed, people [were unhappy and being desirous of order] made Manu, the son of Vivasvat, their king; and they assigned to the king one-sixth part of the grains grown by them, one-tenth of other commodities and money. The king then used these to safeguard the welfare of his subjects.” | (Bk. V, Ch. II, p. 350) “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; That is, in proportion to the revenue which they respectively enjoy under the protection of the state. |
| Certainty of tax | Income tax rate was proportional and equal to one-sixth of income and was fixed by the tax-payers. | “The tax which each individual is bound to pay ought to be certain, not arbitrary.” |
| Economy | p. 220: “A wise Chancellor is one who collects revenue so as to increase income and reduce expenditure. He will take remedial measures if income diminishes and expenditure increases (2.6.28).” (p. 284) “He who produces double the [anticipated] revenue eats up the janapada [the countryside and its people, by leaving them inadequate resources for survival and future production] (2.9).” He (p. 181) suggested for the king, “He shall protect agriculture from being harassed by (onerous) fines, taxes and demands of labour (2.1).” | (p. 351) “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.” |
| Convenience of payment | He (p. 253) observed, “Just as one plucks fruits from a garden as they ripen, so shall a king have the revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking wealth that is not due because that will make the people angry and spoil the very sources of revenue (5.2).” | (p. 351) “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay.” |
| Compliance | The Record Keepers were responsible for collecting the taxes and there were magistrates to “inspect their work and to ensure proper collection of taxes” (2.35). | None |
| Market failure | Kautilya’s Arthashastra | Adam Smith’s Wealth of nations |
|---|---|---|
| Monopolies and monopsonies | (p. 236) stated, “Merchants are all thieves, in effect, if not in name; they shall be prevented from oppressing the people (4.1).” He (p. 134) added, “It is the frontier officer who promotes trade, whereas traders form cartels in order to raise prices [for the goods they sell] or lower them [for the goods they buy]; they are profiteers making one hundred panas on one pana or one hundred measures on one measure of [grain].” | (Book 1, Ch. XI, p. 278) wrote, “It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” |
| Regulation of monopolies and monopsonies | Kautilya (p. 250) recommended, “Cartelisation by artisans and craftsmen with the aim of lowering quality, increasing the profits or obstructing the sale or purchase and by merchants conspiring to hoard with the aim of selling at a higher price (4.2)” would be dealt with stiff punishments of 1000 panas for such offenses. Such a high penalty indicates the perceived seriousness of the offense. He (pp 249.250) recommended punishment for “adulteration”, “fraud”, “false description in selling”, “showing one product and selling another”, and “stealing precious metal in making new objects”, etc. (4.2). | Nothing specific |
Fairness requires that acknowledgement be given only to the thinker, who originates an idea and not to the one, who copies it and tries to claim proprietorship. Secondly, Miss Columbia, Ariadna Gutierrez was erroneously declared Miss Universe but that error was corrected in about three minutes and Miss Philippines , Pia Alonzo Wurtzbach, the rightful winner of the contest, was crowned as Miss Universe. Adam Smith was erroneously declared as the founder of economics and instead of correcting the error, concerted and coordinated efforts have been made over the last two hundred years and are still continuing to perpetuate it. Moreover, one cannot extract any butter by churning buttermilk, in this case The Wealth of Nations, unless s/he has added butter beforehand.
I am thankful to Prof. Anthony Waterman for presenting me with a challenge to show that Kautilya’s Arthashastra was a source of Adam Smith’s The Wealth of Nations. I am grateful to Chandra Kant Raju and an anonymous referee for enhancing clarity and content of the paper.
Balbir S.Sihag, (2016) Kautilya’s Arthashastra: A Recognizable Source of the Wealth of Nations. Theoretical Economics Letters,06,59-67. doi: 10.4236/tel.2016.61008
How ideas get diffused? The person who has new ideas must be willing to share them and there must be a willing and capable host to receive them since these may be complementary or substitutes of his existing knowledge. Role of existing institutions and interests becomes very critical in the acceptance or rejection of new ideas. There were both direct and indirect routes for transmission of ideas from India to Europe . Roman coins at Pudukottai and at other places in southern India have been found indicating that there was brisk trade between India and Italy during the first century BCE and thereafter. In all likelihood not only there were exports of goods from India but also of ideas. Sri Lanka also served as a transfer station for transmission of ideas from India to other countries.
Kautilya’s ideas were transmitted to Indonesia . A king explicitly gave credit to Kautilya’s ideas for his success. [
It is almost certain that Kautilya’s ideas reached Europe also. Use of Indian numerals spread very quickly since they facilitated in conducting commerce and also in tracking the movements of stars and planets. For example, these numerals were transmitted to Middle-East in a matter of few decades. There was a wholesale translation of Indian books at Baghdad’s House of Wisdom. Indian numerals reached Spain in 976. Vasco De Gama travelled to India in 1498, presumably, in search of exploring an alternative route to India that could allow imports of spices directly without any middle man from the Middle-East. He could have filled his boats with spices but instead he chose to take back a boat-load of books from India . Clearly, Indian books were more valuable than spices.
Most likely Machiavelli had access to Kautilya’s Arthashastra. Since he discusses, although without much depth, many of the same topics, such as forming alliances, role of an adviser, role of information, types of army and specifically the delegation of unpopular task (as discussed below), as were discussed by Kautilya. He did not fully understand the Arthashastra, was short of time since he was desperate to find work or tried to modify it to make it look original. As noted by [
| Kautilya (Arthashastra, 4th century BCE) | [ |
|---|---|
| ON Vices Page 137: “Anger makes one the object of hatred, creates enemies and brings suffering on oneself. Excessive greed and lust bring about humiliation, loss of wealth and association with undesirable persons like thieves, gamblers, hunters, singers and musicians. [While both have had bad consequences,] being hated is worse than humiliation; whereas one humiliated is held in thrall by his own people and by enemies, a hated one is destroyed.” Anticipating and Avoiding Discontent Page 158: “Spies in the guise of ascetics shall find out who among the following are happy and who discontented: Those dependent on the King for grains, cattle or money; those who help the King in prosperity and adversity; those who [help to] restrain an angry relative or region and those who repel enemies and forest chiefs. The contented shall be appreciated by giving them additional honors and wealth. In order to make the discontented happy, conciliation shall be the method used. If [conciliation fails and] they continue to be unhappy, they shall be used to collect taxes and fines so that they may incur the wrath of the public. When the people come to hate them, they shall be eliminated either by inciting a popular revolt against them or by secret punishment. Alternatively, they may be sent to work in mines and factories while keeping their wives and sons under close security in order to prevent them from being used by enemies.” | Ch. 19, page 58: “For whoever set up the government of that country understood the powerful are ambitious and insolvent, and judged it necessary they should be bridled so they could be controlled, but on the other hand he recognized the hatred most people have for the powerful, whom they have reason to fear, and the consequent need to reassure and protect the great. So he did not this to be the responsibility of the king, in order to avoid his alienating the powerful by favoring the people or alienating the people by favoring the powerful, and he established an independent tribunal, whose task it is, without incurring blame for the king, to crush the powerful and defend the weak. This arrangement is as intelligent and prudent as could be, and makes a substantial contribution to the security of the king and the stability of the kingdom. This institution enables us to recognize a significant general principle: Rulers should delegate responsibility for unpopular actions, while taking personal responsibility for those that will win favor. And once again I conclude a ruler should treat the powerful with respect, but at all costs he should avoid being hated by the people.” |
suitable to Castruccio. In Diogenes, an ancient philosopher is recorded as having said that he would wish to die like Socrates; Machiavelli makes this Castruccio’s saying, yet he would wish to die like Caesar.”
Machiavelli imitates Kautilya in recommending that a king should delegate an unpopular task to someone else so that the king does not become object of hatred.
This similarity of views on delegation leaves little doubt that Machiavelli had access to The Arthashastra. But To Machiavelli’s credit, he (1513, Ch. 6, p. 18) wrote, “But you cannot exactly in the footsteps of those who have gone before, nor is it easy to match the skill [virtu] of those you have chosen to imitate.” Who were the “many authors” referred to by Machiavelli (p. 48)? Possibly Kautilya was one of them. Kautilya had emphasized the critical role of the ethical values in bringing prosperity.
Similarly, Indian methods of navigation were also transmitted very quickly to Europe . There is new research showing the transmission of calculus from India to Europe . Interestingly, even Indian cows have reached Texas , USA through Africa-Europe-Caribbean-Mexico. Given all these facts, it is unthinkable that other Indian thought including Kautilya’s Arthashastra had not reached Europe .