Kautilya - The True Founder Of Economics

On January 10, 2013 – I posted a write up on “KAUTILYA's Principles of Taxation and ADAM SMITH's Canon of Taxation”. The post was left open as usual for reader’s opinion. This post is different. Kindly read further to know how different it is. Thanks.

Today when I went to library and browsed some book, where I found an interesting book titled “Kautilya - The True Founder Of Economics” by Prof. Balbir Singh Sihag. 

In the book (page no. 10-11) he had given a partial list of concepts used by Chanakya alias Kautilya in his book Arthashastra (4^th Century BCE). The list is as follows:

Genesis  of the Concepts in Arthashastra  during 4th Century BCE	Re-emergence of these concepts
	Authour	Year
Opportunity Cost	Wieser	1889
Demand and Supply Framework	Marshall	1870
Law of Diminishing Returns	Turgot	1766
Liquidity	Keynes	1936
‘All other things being equal’	D Bernoulli	1738
Marginal Analysis	Turgot	1766
Constrained Optimization	Walras, Slutsky	1874-77, 1915
Distinction between Short Run and Long Run	Marshall	1870
Moral Hazard	Adam Smith	1776
Linear Income Tax	Mirrless	1971
Public Goods	Lindahl, Samuelson	1919, 1954
Producer Surplus	Marshall	1870
Importance of Capital Formation	Adam Smith	1776
Theory of Gains from Trade	Ricardo	1817
Crime and Punishment	Becker	1968
Efficiency Wages	Marx, Solow	1867, 1979
Risk-return Trade-off	Markowitz	1952
Asymmetric Information	Akerlof	1970
Time Inconsistency Problem.	Kyland-Presscott	1977
Non-cooperative game	Waldegrave, Nash	1713, 1951
Contigency Planning	H Stein	1996

The authour also stated that "It may be noted that the above illustratively enumerated twenty-one concepts, used in modern economic analysis, were already used and applied in Kautilya's formulations. Adam smith has the credit for only two..."

Note: The book cost Rs. 650 in Indian Market. (as mentioned in the book cover and this info is for the readers who wish to buy)

RBI's Third Quarter Review and Rational behind it

Recently RBI had announced its Third Quarter Review (for Full review of TQR Click here). Many analysts, economist and markets were surprised of its announcement because it has raised the Repo Rate by 25 basis points. RBI had said that from next announcement it will follow Dr. Urjit Patel Committee reports recommendation. But, when one reads the policy he will definitely see that even this quarter review announcement of RBI seems to be based on Committee report; because it talks more about CPI (whereas in its earlier policies it use to mention both CPI as well as WPI).

Let us have a look what is some rationale behind the hike of Repo rate. If one sees the graph above then one will see the main rationale behind the policy, as it says, is inflation control, is absolutely right and acceptable. But when one read the graph carefully then one will see when WPI had fallen (which was the lamp post for earlier policies) then Repo rate should have also reduced which never happened (RBI cities due to other reasons for it- which is not clear). In November 2013 there was little hike in Inflation where policy and inflation almost same and in December the inflation had fallen. The present hike is based on the December inflation, but not on the basis of WPI but CPI.

Those who are good at IS-LM Space of Monetary Policy will understand the above graph easily. For others here are the basic 3 conditions 

   1.   Price  Increases – Demand Increases - Interest Rate Increases

   2.   Price  Decreases – Demand Decreases -  Interest Rate Decreases

   3. Price Increases – Demand Decreases - Interest Rate
   (may be in) Status Quo (or) Increases!!

I leave this post wide open for readers perception.

Reagonomics – A Flashback

These days’ people are still thinking or hesitating to take some major economics steps like tapering, increasing interest rates etc… By seeing and analyzing the current scenario I remembered a strong head economist cum politician, former U.S. president, Mr. Ronald Reagan.

The economic policies which he used are popularly known as Reagonomics. He had a simple, but specific plan, of which he spoke often during the campaign: cut taxes, get control of government spending and get the government out of the way so that the entrepreneurial spirit of the American people could be unleashed. Some skeptics derisively called his plan “Reaganomics,” but President Reagan was undeterred.

Many economist and many leaders, across the globe, was amazed and surprised by the way he carried out the economic policies, administration and put U.S. economy on track in short span.

It was the most serious attempt in U.S. to change its economic policy of administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

His program (in 1981) of Economic recovery had four major policy, they are

1. reduce the growth of government spending,
2. reduce the marginal tax rates on income from both labor and capital,
3.  reduce regulation, and
4.  reduce inflation by controlling the growth of the money supply.

He believed that this in turn will increase savings and investment, increase in economic growth, balance the budget, restore healthy financial markets, reduce inflation and also interest rates..

In August 1981, President Reagan signed the Economic Recovery Tax Act of 1981, which brought reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses and incentives for savings. So began the Reagan Recovery. A few years later, the Tax Reform Act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country in the world.

The numbers tell the story. Over the eight years of the Reagan Administration:

• 20 million new jobs were created
• Inflation dropped from 13.5% in 1980 to 4.1% by 1988
• Unemployment fell from 7.6% to 5.5%
• Net worth of families earning between $20,000 and $50,000 annually grew by 27%
•  Real gross national product rose 26%
•   The prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988

During a G7 Economic Summit, the West German Chancellor asked him to “tell us about the American miracle” (Before two years, when he outlined his economic recovery plan these group of world leaders were unconvinced) As President Reagan observed with a wry smile, “I could tell our economic program was working when they stopped calling it Reaganomics”

Today many economist and politicians are more skeptics about taking some bold steps while economy is still quivering.  No doubt current scenario and situation may not be same; but taking decisions boldly can send a right signal to the economy to the take it to the next level.  This is where I admire Reaganomics.  Let us wait and watch how the policy makers do take decisions in coming days.

Sources: 

1. http://www.econlib.org/library/Enc1/Reaganomics.html
2. http://www.reaganfoundation.org/economic-policy.aspx