Book Excerpt: Amidst Protectionism, What We Can Learn Of Free Trade From Kautilya

Excerpted from Economic Sutra: Ancient Indian Antecedents To Economic Thought, by Satish Y Deodhar, with permission from Penguin Random House India.

‘There was more recognition of the role of price and market in some of the Indian writings than in those of Aristotle, viewed by some as the founder of economics.’

—Spengler (1971, p. 49)

Property Rights, Markets, Prices and Trade

Taxation is not an end in itself. Its aim is to cover administrative expenses, provide public goods, create institutional mechanism for protecting property rights and facilitate smooth function of markets. The ultimate objective, of course, is the material well-being of society. Kautilya knew that it is not excessive taxes but market facilitation and increase in output that result in increased treasury as well as material well-being. For example, he asserts that promoting industrious activities, abundance of crops and keeping society away from thievery and trouble ensures increase in treasury (2.8.3). His discussion of the simultaneous existence of privately owned lands and crown lands indicates that the state was not the exclusive owner of all lands, i.e., it did not have Eminent Domain, as has been corroborated by the pre-Kautilya literature discussed in earlier chapters. To him, upholding property rights was important to promote livelihood (8.3.28–29). Hence, penalties and punishments were stipulated for violation of individual property rights. In fact, Kautilya devotes the entire third adhikarana (Book 3) to the conduct of judges, and specifies nature of contracts and rules of evidence concerning movable and immovable properties, loans and deposits, inheritance and marriage. Thus, he had put in place robust institutional mechanisms for market facilitation.

In the plan of a fortified city, he had assigned specific quarters for trading of different goods, location of their warehouses, record rooms, stables and offices of merchant guilds (2.4.9–16). The superintendent of markets was to inspect weights and measures for any frauds committed and mete out punishments (4.2.2). Thus, he had ensured that tangible infrastructure was put in place for smooth functioning of markets. In those days, the most important source of market supplies was agriculture and, therefore, farmland. He acknowledged the variability of land quality, which depended upon variation in rainfall, arability, adaptability of land to different crops and population density. In this, while he may have indirectly invoked diminishing returns to use of land à la Ricardo, he also seemed concerned with non-technical and non- economic factors such as the menace of wild animals, forest tribes and attacks from neighbouring rulers affecting land productivity (6.1.8). Therefore, he had advised that the ruler pick secure locations to settle new villages and market towns with provisions of roads, water tanks and other infrastructural requirements.

Kautilya’s observation about goods auctioned at markets was indicative of his awareness of demand and supply forces and relative scarcity. He was aware of traders restricting supply by colluding and charging monopoly price. For such trade-restricting behaviour, he had mandated heavy penalty (4.2.19). On the other hand, if there was glut in the market, the director of trade was expected to hold back sales to prevent price decline (4.2.33). Kautilya seemed to have a notion of mark-up (cost-plus) pricing as well. The director of trade was to ascertain the cost price after taking into account investment, production, rent, interest, duty and other expenses (4.2.36). This applied to both importables and exportables. For determining the sale price of domestic and imported goods, a 5 per cent and 10 per cent profit, respectively, was allowed over and above the cost price of the goods (4.2.28). There were penalties for sale prices being higher than these stipulated mark- ups. If there was too much competition among buyers for purchase of goods or land, the profits would be too high. In that case, the increased price and the duty were mandated to go to the treasury (2.21.9; 3.9.5). In fact, he was also aware of under-invoicing by traders to avoid duty. If detected, a trader had to pay eight times the regular duty (2.21.7, 11).

Political scientists like Boesche (2003) have argued that Kautilya’s writing supports state-dominated economy with a vision of a socialist welfare state. This may be true only with regard to his views on political statecraft and provision of goods with market failure characteristics. However, in other spheres of economic life, the role of the state was limited to market facilitation. From the available evidence, it can be inferred that Kautilya favoured freer trade if not complete free trade. He had stipulated duty concessions for imported products to augment their supply (2.16.11; 2.21.31). In fact, in his master plan for physical infrastructure of the markets in the cities, he had also arranged for separate quarters for foreign traders. Kautilya’s world view is perhaps reflective of the principles exposed earlier in the Vedic literature. For example, Verse 6.71 in the Maha Upanishad from Sam-Veda (Warrier, 1953; Hattangadi, 2000) states, ‘Only narrow-minded persons discriminate saying one is a relative and the other is a stranger. For the noble-hearted, the entire world constitutes a family.’ It is noteworthy to mention that even the sixteenth century reformist Martin Luther was against trade. Explicitly citing India, he wrote (Luther, 1524, p. 17), ‘But foreign merchandise which brings from Calicut and India, and the like places; wares such as precious silks, and jewels, and spices, which serve only love of show and no useful purpose, and drain the land and people of their money, should not be permitted.’

One had to wait for Adam Smith (1776) to openly profess free trade in Europe. On the whole, Kautilya’s detailed understanding and documentation of prices, cost, domestic markets and foreign trade were more than exemplary for his times. Spengler (1971, p. 49) acknowledged this when he wrote and which I have quoted at the beginning of this chapter, ‘There was more recognition of the role of price and market in some of the Indian writings than in those of Aristotle, viewed by some as the founder of economics.’

Satish Y Deodhar is the author Day to Day Economics. He teaches economics at the Indian Institute of Management, Ahmedabad.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.