Foundations of Economics
Course Outline
Unit 1: Ancient and Pre-Classical Economic Thought
• Indian, Persian and Greek thoughts
• Mercantilist and Physiocrats
Unit 2: Classical Political Economy and its Musings
• Adam Smith, David Ricardo and Malthus
Unit 3: Critical Perspectives on Classical Political Economy
• Karl Marx and Thorstein Veblen
Unit 4: Marginalist Revolution: Neo-classical Undertakings
• Alfred Marshall, Leon Walrus, Vilfredo Pareto
Unit 5: Saving Modern Capitalism: Story of the Great Depression
• John Maynard Keynes
Unit 6: A Dynamic System: Innovation, Creation and Destruction
• Joseph Schumpeter
The Worldly Philosophers, Robert Heilbroner
Adam’s Fallacy, Duncan Foley
Economics is a social science
• Civilisation any society which has developed a writing system, government, production of surplus food,
division of labour, and urbanisation.
• The shift from hunting and gathering to farming was a gradual process that happened 10,000 years ago in
some parts of the world, 5,000 years ago in others.
• Farming and settlements around major rivers led to production of surplus food.
• Societies formed around production of certain commodities and traded with each other. There was division of
labour across civilisations.
• Division of Labour and Surplus Production – two most important concepts to understand economy.
• Different perspectives exist that view socio-economic reality through their particular lens.
• For example, the definition of economics itself varies
“A study of mankind in the ordinary business of life; it examines that part of individual and social action which is most
closely connected with the attainment and with the use of the material requisites of wellbeing [. . .] Thus it is on the one
side a study of wealth; and on the other, and more important side, a part of the study of man.” Marhsall (1890)
“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 revenue or
subsistence for themselves; and secondly, to supply the state or commonwealth with revenue sufficient for the public
services. It proposes to enrich both the people and the sovereign.” Smith (1776)
“The combined assumptions of maximizing behaviour, market equilibrium, and stable preferences, used relentlessly and
unflinchingly, form the heart of the economic approach as I see it.” Becker
“Economics is a science which studies human behaviour as a relationship between ends and scarce means which have
alternative use” Robins (1932)
Ancient Indian Economic Thought
• Oldest civilisations of Sindhu-Saraswathi between 2300 BCE and 1700 BCE
• Embedded in international trade – ivory, garments, spices and peacocks exported to Mesopotamia, Israel;
indigo, tamarind wood to Egypt.
• Developed urban centres – cost-effective mud-bricks with straw used in homes for thermal insulation, for
drainage system, baths, city walls and granaries.
• Various texts like Dharam shastras (law books), Vedas (sacred texts), Puranas (blend of history and
mythology to convey philosophical ideas to common people)
• Usually, Indian philosophy is thought to be about other-worldly goals, but there is a lot to say on material
prosperity.
Themes that are common in ancient texts and mythologies
• Wealth begets wealth – capital as an input to create more wealth
• Panini, the grammatarian, laid down rules and symbols for expressing per cent (%)
• Charvak’ s material philosophy:
“As long as you live, live happily. Drink ghee even if you have to borrow money. For, once consigned to flames,
who can return [to enjoy life]?”
• Rig-Veda mention desires, material prosperity and wealth.
• Tamil treatise – Thirukkural (1st and 3rd century BCE) underscores the importance of wealth.
Artha-shahtra
Background
• Chanakya (flourished 300 BCE) was a Hindu statesman and philosopher who wrote a classic treatise on
polity, Artha-shastra
• Chanakya became a counselor and adviser to Chandragupta (reigned c. 321–c. 297), founder of the
Mauryan empire of northern India, but lived by himself. He was instrumental in helping Chandragupta
overthrow the powerful Nanda dynasty at Pataliputra, in the Magadha region.
• Chandragupta (died c. 297 BCE, Shravanbelagola, India) was the founder of the Mauryan dynasty (reigned
c. 321–c. 297 BCE) and the first emperor to unify most of India under one administration. He is credited with
saving the country from maladministration and freeing it from foreign domination.
• It was mainly because of Chanakya that the Mauryan empire under Chandragupta and later under Ashoka
(reigned c. 265–c. 238) became a model of efficient government.
“Sustenance and livelihood of people depend upon wealth that is acquired from natural resources [earth].
Arthashastra is the means of sustainable acquisition of the wealth. Among the three goals of human existence—
righteous conduct, material wealth, and love and pleasure—acquisition of material wealth is upreme, for the
other two are dependent on it. It is the duty of the ruler to ensure yogakshema, i.e., the welfare of the people,
and, that in the happiness of the subjects lies the happiness of the ruler.” (Kautilya)
• Modern definitions of economics seem narrow and reductive. For example, non-economic welfare is not
factored in.
• Bertrand Russell (2017) too opined in his book, Proposed Roads to Freedom, ‘And if socialism ever comes, it
is only likely to prove beneficent if non-economic goods are valued and consciously pursued.
Background of Markets and State
• Markets represent the place where buyers and sellers meet to exchange goods and services
• State as a broader institution involves governance, judiciary and army.
• Agriculture plays a crucial role in providing food for sustenance of general population.
• The agriculture had the potential for surplus production.
• In ancient civilization, wealth was generally the reward for political, military, or religious power or status,
and not for economic activity
Wealth tended to follow power; and in contemporary market society power follows wealth
Major Ideas
The objective of the Arthashastra was to have a manual that revolved around maintaining economic and political
stability and a centralized administrative system.
The treatise was intended for the use of rulers in general and not for any king or empire in particular.
• Kautilya’s main focus is on dharma, artha, kama and moksha; i.e., righteous conduct, acquisition of material
wealth, pleasure and love, and salvation.
• Kautilya considers artha as the foremost among them, for other life objectives cannot be achieved without
having a basic source of livelihood.
Provision of Public Goods: Kautilya considered it the state’s duty to provide them.
‘the happiness of the ruler lies in the happiness of the subjects’
• He prescribes state provision of public works such as tanks, dams, roads, waterways and irrigation canals.
• State should support private irrigation works by giving land, implements and roads access
• Non-agricultural lands are expected to be given on lease as cattle pastures, and settlers are allowed in
identified forests to trade in forest produce.
• Ore and mineral/salt mines were to be owned by the state; However, if leased out, then monopoly tax was to
be collected
• State to provide welfare: Helpless among children, people in distress, women with no children and aged
persons must be looked after by the state.
• Public Finance
• Kautilya categorically states that the role of the government is dependent on finance, and hence, the ruler
must focus his attention on the treasury.
• Taxes should be collected the way bees collect honey from flowers. He emphasized that taxes should be
collected sustainably, just as only the ripened fruits are picked from the orchards, with the un-ripened ones
given time to mature, else citizens might revolt against the ruler.
• Duty on all manufactured products such as liquor, yarn, ghee, oil, sugar, crafts, gold smithy.
• Mining of gold, silver, diamonds, gems, corals, pearls, shell, metals, salt, ores, and rocks.
• Land revenue on private property
• Forest produce: timber and grass; grazing lands for cattle
• Animal husbandry, where the animals were reared for milk, meat, wool or as beasts of burden
• Trade routes both over land and over water.
• Mulya was the price of a commodity and a standard 8 per cent tax called rupika was levied on products
manufactured — with 5 per cent on items such as salt, sugar, wines, liquor and gambling, and 10 per cent on items
such as silk cloth, various metals and sandalwood.
• Bali/kara was tax collected annually or biannually where traders and artisans were to pay one-fifth of their profit in
silver or gold to the state.
• Land revenue, called bhaga, was an important tax for the state. Those who owned lands would give one-sixth of the
produce to the state.
• Road tax for protection and upkeep of road on which goods were carried. It could be paid in cash or in the form of
ghee, oil, cotton or betel leaves.
• Water cess for using water for irrigation purposes;
• Fixed levy charged at ports on riverbanks; customs duty of about 20 per cent on imported goods; one-time special
levy and penalty for violating state regulations
On Markets
• Upholding property rights was important to promote livelihood. Hence, penalties and punishments were stipulated
for violation of individual property rights.
• Attention 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.
• 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.
• 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.
• 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.
• 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. There were penalties for sale prices being higher than these
stipulated mark-ups.
• Providing access to loan is an important component of market facilitation.
On Labour
• He advocated minimum wages system. This applied to employees such as servants, guards, valets, palanquin bearers
and unskilled labourers.
• In the private sector, for agricultural labourers, watchmen, cowherds and others, Kautilya had fixed the rate at direct
cash in addition to annual provision of food for the labourer and his family
• He also stated that professionals such as physicians, storytellers, artisans and others should receive remuneration
similar to what others like them would get elsewhere (opportunity cost).
• For yarn, textile and armour-making, he specifies that wage should be determined based on the amount of work,
quality and time required.
• Kautilya writes about labourers’ rights and occupational safety as well. If a labourer is incapable, falls ill or is
in calamity, he can obtain annulment of his work agreement or get the work done by another person.
• Kautilya prescribes that when a work is being done through a sangha, i.e. a guild or a union, a labourer
cannot work for more than seven days, and if work is expected to continue, the union will provide another
labourer to complete the work.
• Indians did not have a slave-owning society like the one in ancient Greece. However, bonded labour still
existed, where, a person’s services were pledged to another at times of distress or non-payment of loans, etc.
They had a right to be freed from the pledged status by redeeming through accumulated savings from their
job.
• One could not take a minor below the age of eight years as bonded labour.
• Political scientists like Boesche (2003) have argued that Kautilya’s writing supports state-dominated
economy with a vision of a socialist welfare state.
Thiruvalluvar’s Vision: Polity and Economy in Thirukkural
It is dated anywhere from the second century BC to the eighth century AD. Neither authorship nor the date,
then, can be considered certain.
• The couplets take for granted the standard Indian fourfold goals of life: dharma, artha, kama, and moksha,
rendered in Tamil as aram, porul, inbam, and veedu.
• Thirukkural, however, deals with only the first three goals. It is presumed that if one leads life according to
ethical principles, the fourth one follows.
• The Role of the King and His Desirable Attributes; Administrators of the Kingdom; On War and Strategy
Economy
• Thiruvalluvar condemns poverty.
• Thiruvalluvar gives central place to agriculture. He glorifies the farmer as the one who supports the world.
Factors Contributing to Economic Prosperity:
• One such skill is the ability to learn, to acquire knowledge – human capital in modern parlance
• In order for an economy to produce, it needs human labor as well. Thiruvalluvar offers advice in recruiting
and retaining employees.
• Another asset is a resolute mind—the strong-willed are undaunted by failure.
Economy
• Thiruvalluvar seems to recognize that good health is part of the equation in economic activity.
• Thiruvalluvar saw that hoarded wealth is useless wealth, foreshadowing the underconsumption theorists of
modern times.
• He recognizes the need for a sense of social responsibility. Society, he says, will crash without good people.
• There is virtually nothing said about the role of the state in the economy.
• He seems to advocate co-operation rather than competition in the pursuit of economic interests.
• It is appropriate, therefore, to describe his economy as a semisocialist cooperative commonwealth.
Comparison
• Unlike Kautilya’s Artha Shastra, Thirukkural is not an elaborate book on statecraft. The behaviors it
advocates are derived from the general ethical principles that color the work.
• His writings are addressed as general guidance to anyone running the state. He does not go into elaborate
details or specifics.
