Kautilya on Moral Hazard, Poverty and Systemic Risk

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The first Population Census in the world. Statistical Economics, Mathematical Economics. The factoring in of Moral Hazard, the question of Ethics, acknowledging the fact that economics is about people. Including Systemic Risk into accounting for costs and profits and alleviating poverty. These are some of Kautilya's observations some 2,500 years ago. They are all valid today, for the modern world.

According to Abraham Seidenberg (1962), mathematics originated in India earlier than Babylonia, Egypt or Greece. Sidney Weintraub argues that the image of economics in the western world changed as the image of mathematics changed but Without realising that the image of mathematics in the west might have changed with the, change in the theology/philosophy of, the church. CK Raju points out that theology or philosophy did not change constantly, in the Indian subcontinent. Mathematical measurements are pre-Vedic here, beginning with the early Indus Valley inhabitants which have continued through generations. Kautilya was the first economist who established economics as a separate discipline, developed a score of concepts and understood economy as a system with its inter-linked elements. Arthashastra contains two parts: the exchange theory and the conflict theory but both, use mathematics to enhance clarity of expression and statistical analysis for arriving at the best possible policy-decisions under risky situations and evaluations afterwards. This book argues why Kautilya is relevant to modern-day policy-makers and why Ethics should be a part of the Indian education content.

Balbir S Sihag is a Professor of Economics. He received a Master's degree in Economics from Panjab University Chandigarh. He was awarded an UGC scholarship and was Merit selected to the Indian Economic Service. He received PhD in Economics from Massachusetts Institute of Technology (MIT) and was Professor of Economics at University of Massachusetts for twenty two years and is now Professor Emeritus of Economics. He is the author of the book, Kautilya: The True Founder of Econornics and 31 research articles on Kautilya's various contributions to economics.

Modern economics may not be a dismal science but it has definitely become an amoral science. Every consumer, investor, producer, bureaucrat or a politician is assumed to be a utility maximiser, serving his/her own interest. Transaction cost economics has taken it too far, since its sole reliance on contracts has crowded-out conscience-based committments. It has fostered trust deficit and a 'culture of suspecion'. Legalistic approach has replaced the ethics-based approach and fiduciary duty has replaced the moral duty. Instead of alleviating the moral hazard problem, it has made the problem more serious and widespread. It may be noted that the moral hazard problem is neither new nor confined only to the modern corporations. In fact, Kautilya understood and dealt with this problem during the fourth century BCE. What is new? An urge for instant-gratification and acceptance of the principle: greed is good. Then, why should people get surprised when they learn about insider-trading, cooking of books or resorting to bribery to get contracts? According to Kautilya, a moral hazard problem can never be alleviated by rules and regulations. He put heavy emphasis on ethical anchoring of children.

The first part of the book brings out Kautilya's ageless insight: an ounce of ethics is better than a ton of laws. Unfortunately, both Machiavelli and Adam Smith undermined the role of ethics and there is no realisation on the part of economists or policy-makers that the moral hazard problem is unsolvable by rules, regulations or contracts. Kautilya suggested that the creation of an ethical society was the only way to eliminate the moral hazard problem altogether. Board of Directors is a relic of the past industrial economy and has lost its usefulness to the knowledge-based economy. More importantly, it can never ameliorate the problem of moral hazard. Kautilya's organisational structure is more efficient for corporate governance and management. Adam Smith inappropriately compared an economic system to a machine. His mechanistic definition of a system ignores people. Parts of a machine do not negotiate terms of engagement with each other or display any moral hazard problem, but people do. Kautilya's ideas are ageless since even after 2,300 years, they are still relevant to solving many of today's unsolvable problems, such as systemic risk and corruption.

Now think: will anyone remember Adam Smith in 4076 CE, that is after a passage of 2,300 years from the writing of the Wealth of Nations in 1776? Sihag (2014, Chap 3) challenges the currently accepted history of economic thought that economics originated during the eighteenth century and Adam Smith is the founder of economics. For the first time, strong arguments are provided why Kautilya should be considered as the founder of economics. Adam Smith came to be accepted as the founder of economics based on the arguments that (i) he was the first one to write a treatise on economics, and (ii) he synthesised brilliantly the existing ideas. It is shown in my work that Kautilya was the first economist who accomplished all these feats and more, and two thousand years earlier than Adam Smith. Kautilya, not Smith, carved out economics as a separate discipline.

Additionally, Kautilya's Arthashastra is much more sophisticated, both in method and content than Adam Smith's Wealth of Nations. This chapter (Sihag 2014, Chap 3) contains the following paragraph: In summary, Kautilya's Arthashastra does contain what Schum peter (p 248) called a 'theoretical skeleton' and thus it cannot be labeled pre-scientific. The above analysis establishes that Kautilya's Arthashastra declares economics as a distinct discipline and thus satisfies the first requirement to declare it as the first origin of economics. I had sent a preliminary draft of this chapter to Prof Anthony Waterman. He commented, 'It can't be the "origin of economics" since there was no transmission to present-day economic discourse (which is what we mean by "economics"). It is, rather, an early example of the way good thinkers conceptualise economic problems. There's no reason to suppose the human mind has changed very much in the last three millennia. We might find other, similar examples in other civilisations, if we looked hard enough'.

This response aroused my curiosity and I started exploring it as soon as my book was published. Kautilya wrote hisArthashastra during the fourth century BCE and it is hard to believe that, despite a passage of two thousand years, Kautilya's ideas would not have gotten transmitted to Europe, since there have been extensive contacts between India and Europe for thousands of years. Additionally, there has been a consensus that Adam Smith's Wealth of Nations does not contain a single original idea. An important question would be: where did he lift those ideas from? Ferguson exposed Adam Smith for making a false claim related to the pin-factory example.

**Contents and Sample Pages**