The words incentives and economics have become almost synonymous. Kautilya recognized the principal-agent problem and suggested various mechanisms to induce agents to supply optimum effort. He implic­itly proposed a conceptual framework that was comprehensive and con­sisted of three components.

 

The first component called for matching the incentive to the agent. According to Kautilya’s conceptual framework, material incentives were intended to strengthen the practice of ethics and not to undermine it.

 

The second component involved matching the material incentive to a worker’s needs and position. He attempted to find the right mix of job security, efficiency wages, and sanctions (i.e., disincentives, such as investigations or audits, fines, and dismissal) to address the problem of moral hazard and promote economic efficiency. He realized a blend of moral and material incentives was not likely to work and needed to be combined with audits or supervision. His other incentive programs [were] bonuses to reward better quality and extra output, promotions, and job tenure for honesty.

 

Bureaucracy, and tendency towards corruption

According to Kautilya, the king could not run the country alone and there­fore needed to establish a bureaucracy to assist him.  “A king can reign only with the help of others; one wheel alone does not move (a chariot). Therefore, a king should appoint advisers (as councillors and ministers) and listen to their advice.”

 

Kautilya believed that “the intrinsically pure man is rare.” According to him, some bureaucrats might become corrupt and lazy: “Just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money”. He added, “It is possible to know even the path of birds flying in the sky but not the ways of government servants who hide their [dishonest] income”.

 

Quality of selection, and reward

Kautilya presented not only a complete salary structure according to qual­ifications but also developed comprehensive procedures to verify the cre­dentials of potential candidates. “A councillor or minister of the highest rank should be a native of the state, born in a high family and controllable [by the king]. He should have been trained in all the arts and have logi­cal ability to foresee things. He should be intelligent, persevering, dexter­ous, eloquent, energetic, bold, brave, able to endure adversities and firm in loyalty. He should neither be haughty nor fickle. He should be amicable and not excite hatred or enmity in others”.

 

Kautilya stated, “Those who have all the qualities are to be appointed to the highest grade (as Councillors), those who lack a quarter to the middle grades and those who lack a half to the lowest grades”. He speci­fied the salaries of the highest grade between 4,000 and 48,000 panas, of the middle grade between 250 and 3,000 panas, and of the lowest grade between 60 and 120 panas. Interestingly, a salary of 48,000 panas for the chief of defense equaled the combined salaries of all other senior management officials (the four chief commanders [8,000 panas each] and four divisional commanders [4,000 panas each]).

 

Kautilya recommended a complete verification and evaluation of an appli­cant’s abilities and capabilities:

 

“Of these qualities, nationality, family background and amenability to discipline shall be verified from reliable people [who know the candi­date well]. The candidate’s knowledge of the various arts shall be tested by experts in their respective fields. Intelligence, perseverance and dex­terity shall be evaluated by examining his past performance while elo­quence, boldness and presence of mind shall be ascertained by inter­viewing him personally. Watching how he deals with others will show his energy, endurance, ability to suffer adversities, integrity, loyalty and friendliness. From his intimate friends, the King shall find out about his strength, health, and character (whether lazy or energetic, fickle or steady). The candidate’s amiability and love of mankind [absence of a tendency to hate] shall be ascertained by personal observation.”

 

According to Kautilya, a person should be appointed as a judge only if he had unbending moral values (the dharma test), and a person should be appointed as a treasurer or chancellor only if he was incorruptible (the artha test).

 

A perfect description of corrupt Congress and BJP

 

He described coercive practices as follows: “A decadent king . . . oppresses the people by demanding gifts, seizing what he wants and grabbing for himself and his favourites the produce of the country” [Sanjeev: This is what Nehru and his dynasty have done; and BJP]. He continued that such a king “fails to give what ought to be given and exacts what he cannot rightly take”; “indulges in wasteful expenditure and destroys profitable under­takings”; “fails to protect the people from thieves and robs them himself”; “does not recompense service done to him”; “does not carry out his part of what had been agreed upon”; and “by his indolence and negligence destroys the welfare of his people”.

 

Moreover, he believed in the rule of law and the protection of private property, which were considered essential for providing security and incentives to save and invest, and which also implied the exclusion of coercion as an instrument for accomplishing eco­nomic ends.

 

He was concerned about the prevalence of shirking and cor­ruption despite heavy emphasis on moral education. He realized that moral persuasion or reasoning alone was insufficient for making people behave honestly if they were lazy or opportunistic.

 

He introduced the concept of material incentives to complement the moral incentives. Both efficiency wages and supervision are required.

 

Chanakya's solution to corruption in a nutshell
Kautilya knew that incentives were a blunt instrument unless tailored to each person individually, that is, a matching of incentive-type to agent-type was critical for their effectiveness.

The king must lead by example

An employer’s ethical behavior had a positive effect on a worker’s effort. “A rajarishi is one who . . . has self-control, having conquered the [temptations] of the senses,” “cultivates the intellect by association with elders,” “is ever active in promoting the security and welfare of the peo­ple,” “endears himself to his people by enriching them and doing good to them,” and “avoid[s] daydreaming, capriciousness, falsehood and extrava­gance”. He continued, “A rajarishi shall always respect those coun­cillors and purohitas [the royal chaplain] who warn him of the dangers of transgressing the limits of good conduct, reminding him sharply (as with a goad) of the times prescribed for various duties and caution him even when he errs in private.” “If the king is energetic, his subjects will be equally energetic. If he is slack the subjects of the courtier, ignoring or not returning his greeting, neither giving a seat nor looking at him”.

According to Kautilya, a king should be impartial, benevolent, farsighted, disciplined, and ener­getic and set an example for his employees and subjects. The king “should look into the affairs with those who are present. With those who are not present he should hold consultations by sending out letters.”

Different solution for different people

He identified three types of agents: upright (moral), opportunistic (amoral), and wicked (immoral). 

 

A moral agent needs only persuasion to motivate him. A moral agent always worked hard whether material incentives were provided to him or not. An offer only of material incentives without any persuasion to a moral person might infuriate him. Material incen­tives alone without any regard to moral motivation might do more harm than good. His ideas may be expressed algebraically as follows. However, almost all contemporary economists practice value-neutral economics, that is, they ignore moral incentives. Economics is much more than material­ism.

 

All three instruments were needed to move an amoral agent from a low level of effort to the optimum level of effort. With that in view, he introduced material incentives to complement moral incentives and persuasion. It is not claimed by Kautilya that economic incentives transform a person from amoral to moral. Kautilya believed that “it is difficult to change intrin­sic nature.” Rather, the claim is a very modest one: that carefully designed incentives are likely to make an amoral agent behave like a moral one. [But] Kautilya believed that any unfair material incentive might do more harm than good. If the agent considers the package to be fair, and the prin­cipal to be ethical, he works harder. 

 

Kautilya considered many kinds of material incentives, such as efficiency wages, promotion, and job tenure, and the degree to which they matched the specific needs and position of an individual employee. He was perhaps the first economist who suggested the payment of efficiency wages. According to the theory of efficiency wages, the employer pays a wage that is higher than the market wage, so that the worker is not tempted to shirk and thereby lose his job.

 

Kautilya suggested matching material incentives to the specific rank of the employee. He suggested that the king should rely more on the payment of efficiency wages to upper-grade employees, such as the chief of the forces, councilors, the chancel­lor, the treasurer, the auditor, and ministers. On the other hand, the king should rely more on granting promotion and job tenure to the middle-and lower-grade employees, awarding prizes to soldiers, and giving gifts to piece-rate workers.

Kautilya advised the king to treat the councilors and ministers (about eighteen officials) with respect and dignity and compensate them hand­somely, since their wisdom and intelligence were the most important resource for the survival and economic growth of the country. He stated, "Some teachers hold might to be more important than the power of good counsel and judgment. [They argue:] however good a king’s anal­ysis and judgment, he thinks but empty thoughts if he has no power. Just as a drought dries out the planted seeds, good judgment without power produces no fruit.  Kautilya disagrees. The power of good counsel, [good analysis and good judgment] is superior [to sheer military strength]. Intelligence and [knowledge of] the science of politics are the two eyes [of a king]. Using these, a king can, with a little effort, arrive at the best judgment on the means, [the four methods of conciliation, sowing dissension etc.] as well as the various tricks, stratagems, clandestine practices and occult means [described in this treatise] to overwhelm even kings who are mighty and energetic.

Particularly the councilors were the most prized employees, and every effort was made—including the payment of a salary of 48,000 panas (a silver coin used as money)—to retain them.

 

Only the wicked one, who did not care for persuasion, might respond to incentives and supervision. Kautilya believed that “the evil one harms, even if treated well. Between a serpent and an evil man, the serpent is preferable. The serpent bites occa­sionally, but the evil man at every step.”

According to Kautilya, a decline in moral motivation would require payment of higher wages and also incurring an extra expenditure on monitoring to achieve the same level of output.

[Re: Motivation] Kautilya explained, the king should say to his troops, “I am as much a servant [of the State] as you are; we shall share the wealth of this state.” Kautilya continued, “Bards and praise-singers shall describe the heaven that awaits the brave and the hell that shall be the lot of cowards. They shall extol the clan, group, family, deeds and conduct of the warriors.” Kautilya emphasized three things: a common objective (service to the state), an eco­nomic incentive (“share the wealth”), and a moral incentive (“the heaven that awaits”). [Sanjeev: This is a very crucial point. When everyone sees an honest king/ruler, they redouble their efforts.]

Auditing

Kautilya considered both the direct inspection of the work of the officials and an indirect one through consumers’ complaints. As he suggested, “The king shall have the work of Heads of Departments inspected daily, for men are, by nature, fickle and, like horses, change after being put to work. He believed that employees, if not inspected, might shirk.

Kautilya realized that it was physically not possible to supervise the chancellor and recommended efficiency wages and auditing to reduce cheating. He suggested that the chancellor and the treasurer be paid 24,000 panas annually, “enough to make them efficient in their work”. [But] Kautilya [added], “High officials shall . . . render accounts in full for their respective activities, without contradicting themselves”.

Tenure (and reward) for lower employees

Middle- and lower-grade employees, who might be highly risk-averse, would appreciate job tenure. Kautilya recommended that this group of employees, who were honest, efficient, and loyal, be pro­moted to permanent positions. But he also advised inspection so that these employees did not slack after getting tenure. Usually, economists put too much empha­sis on variability in an employee’s pay, but according to Kautilya, a safe working environment was equally important.

 

Kautilya recommended extra payments as an incentive to these workers so that they made products of better quality and also worked on holidays. As Kautilya suggested, "For better work [or greater productivity] women who spin shall be given oil and myrobalan cakes as a special favour."

 

Kautilya on Punishments

Kautilya was against the indiscriminate use of coercion. He was aware of the unethical use of power and he wanted to accomplish with incen­tives what was accomplished earlier by coercion. For example, Kautilya observed that “some teachers say: ‘Those who seek to maintain order shall always hold ready the threat of punishment. For, there is no better instrument of control than coercion.’ Kautilya disagrees”.  [Sanjeev: This is the great problem with the Jan Lokpal Bill and the mindless socialism preached by Arvind Kejriwal. It simply can't work.]

Kautilya recommended severe and certain statutory punishments (nor­mally monetary) for mismanagement and corruption. According to him, the magnitude of punishment should vary with the nature and severity of the mismanagement, whether it was due to ignorance, laziness, timidity, corruption, a short temper, arrogance, or greed on the part of the offi cial. Kautilya observed, “Those officials who have amassed money [wrong­fully] shall be made to pay it back; they shall [then] be transferred to other jobs where they will not be tempted to misappropriate and be made to dis­gorge again what they had eaten”. He continued: “An officer negli­gent or remiss in his work shall be fined double his wages and the expenses incurred”.

5. Conclusions

Kautilya was aware of the principal-agent problem, which arises whenever institutional structures are created. He explored many types of incentives to mitigate the harmful effects of the agency problem. He recommended moral motivation along with a judicious mix of efficiency wages and investigation to elicit optimum effort, honesty, and loyalty. Kautilya’s analysis provides several valuable insights. One is that, if pos­sible, an attempt should be made to match the incentive to the agent. Kautilya demonstrated that material incentives should be designed in such a way that they are perceived as fair so that moral motivation is not under­mined.

Kautilya specifies a very broad scope for economics. He applies economic analysis not only to core topics like taxation and economic growth, but also to other areas, such as law, war and peace. In fact, economics might have acquired the status of an imperial science during his time, the fourth century BCE. After a lapse of two millennia, economics re-originated but initially its scope was limited primarily to issues related to economic growth. However, from the later half of the nineteenth century, its scope has been increasing steadily and it has been colonizing other disciplines.

 

In section 6, Kautilya’s methodology, which is very similar to Marshall’s, is offered. Kautilya adopts a partial equilibrium approach and very frequently but implicitly, uses phrases similar to the phrase ‘all other things being equal’. Also, he implicitly uses the discrete marginal analysis.

 

5. Kautilya’s Arthashastra on definition and scope of economics

The word Arthashastra is a combination of two words: Artha and Shastra. Kautilya uses the word Artha (p. 100), as “wealth” and (p. 145) as “material well-being”. There is no ambiguity regarding the word Shastra: it means science. As Varma (1995-1996, p. 583) observes, “The name of the book is shastram, which means a philosophical and theoretical exposition and not a historical presentation”. However, in later time periods, the original meaning of the word Shastra was diluted and was used to denote even inconsequential works.

 

5.1 Kautilya on the scope of economics

Kautilya (p. 99) described his work as: “This Arthashastra is a compendium of almost all similar treatises, composed by ancient teachers, on the acquisition and protection of territory. Easy to grasp and understand, free from verbosity, Kautilya has composed this treatise with precise words, doctrines and sense (1.1). Interestingly, “The Method of Science”, is placed at the end rather than in the beginning of The Arthashastra.

 

Kautilya covers a wide range of topics, such as economic growth, taxation, government expenditure, administration, crime and punishment, property laws, consumer protection laws, labor laws, foreign trade, war and peace, principal-agent problem, diversification to reduce risk and many others. Essentially, anything related to the wealth and welfare of citizens is covered in The Arthashastra.

 

He (p. 100) summarizes the scope of The Arthashastra as: “The science by which territory is acquired and maintained is Arthashastra – the science of wealth and welfare (15.1)”.

 

6. Kautilya’s methodology: a partial equilibrium approach

Adhishthanam tatha karta, karanam cha prithagvidham, vividhashcha prithakcheshta,daivam chaivaatra panchamam, i.e. Success (output) depends on five factors: initial conditions, doer (labor), tools (capital), managerial efforts and random variables (luck). Gita (2nd BCE, Chap. 18, Verse 14).

 

6.1 Kautilya on the role of methodology

Book 15, which is the last one in The Arthashastra, has just one chapter and it deals exclusively with methodology adopted in writing it. Kautilya (p.101) stated, '‘Thirty-two stylistic and logical devices are used in this work’’. Some are stylistic rules like the ones in ‘University of Chicago Manual of style’’. But others are more substantive such as stating a hypothesis, reasoning to prove it, a conclusion and a recommendation.

 He (p. 103) stated, ‘Reasoning is used to prove an assertion. In asserting [in {1.7.7}] that artha alone is supreme, the reason is given: ‘because dharma and kama depend on artha’.

Kautilya’s goal in establishing methodological rules was not to accelerate the creation of knowledge, rather to ensure that the reader understands him clearly. The sentence ‘Easy to grasp and understand, free from verbosity'.

6.3 Implicit use of “Other Things Being Equal” by Kautilya

The use of this phrase has been more widespread than acknowledged by the modern writers. Kautilya was possibly the first economic thinker who implicitly used phrases similar to the phrase “all things being equal’ in economics. Two examples from his Book 7 are presented to support this claim[11].

 

Kautilya (p. 665) suggested (to the king), “Where there is a choice between kings equally immune to the diplomacy of the aggressor, the weak king shall seek the protection of one who has better counselors and who surrounds himself with wise elders. When there is a choice between kings equally immune to the diplomacy and

might of the aggressor, the one who had made more extensive preparations for war shall be preferred. When there is a choice between kings equally immune to the diplomacy, might and energy of the aggressor, he who has battlefields favorable to him shall be preferred; among those having equally favorable battlefields, he who can fight at a time suitable to him shall be preferred; among those equal in place and time of war, he who has better weapons and armor shall be preferred (7.15)’.

 

A few points may be noted. First, Kautilya is engaged in thought experiments as to how a weak king should explore his choice set. Second, he first compares two kings in terms of just two variables, adds the third variable while holding the other two variables constant and so on. This is essentially a partial equilibrium approach.hus his analytical approach is identical to that of Marshall.

 

6.4 Use of marginal analysis by Kautilya

Kautilya implicitly used discrete marginal analysis.

 

Kautilya (p. 259) stated,“With increased wealth and a powerful army more territory can be acquired, thereby further increasing the wealth of the state (2.12)”. Two points are in order. First, he was referring to a dynamic process and secondly to increments in wealth, army and territory.

 

He (p. 565) argued, ‘When the degree of progress is the same in pursuing peace and waging war, peace is to be preferred. For, in war, there are disadvantages such as losses, expenses and absence from home (7.2)’. Kautilya clearly emphasized the concept of additional net gain in making comparisons between choices. In calculating the net gain, he netted out the disutility of staying away from home. Thus according to Kautilya, a king should not wage a war unless the net gain from a war was greater than that in pursuing peace.

7. Kautilya on optimization subject to constraints

Kautilya (p. 115) explained, “If only one method is recommended, it is defined as ‘placing a restriction’, if a choice is suggested, it is an ‘option’ and if two or more are to be used together, it is a ‘combination’ (9.7)’.

Kautilya used optimization subject to resource constraints. He (pp. 199-200) suggested, ‘The five aspects of deliberating on any question are: (i) the objectives to be achieved; (ii) the means of carrying out the task; (iii) the availability of men and material; (iv) deciding on the time and place of action and (v) contingency plans against failure (1.15)”. Kautilya (p. 166) explained the phrase “means of carrying out” as "Of the four means of dealing with dangers, [conciliation, placating with gifts, sowing dissension and use of force], it is easier to employ a method earlier in the order (9.6)".

Specification of an objective and the phrase “availability of men and material” clearly establish optimization subject to constraints.

8. Kautilya on inter-temporal choice

He (p. 636) asserted, "When the gains from two campaigns are equal, the king shall compare the following qualities and choose the one which has more good points: place and time; the power and the means required to acquire it; the pleasure or displeasure caused by it; speed or slowness of getting it; the proximity or distance; the immediate and future consequences; its high value or constant worth; and its abundance or variety (9.4)".

Kautilya (p. 594) asserted, "A king may agree to forego a large immediate gain and seek [only] a small future benefit if he intends to use again the partner who is being helped (7.8)”

9. Kautilya’s Arthashastra on economics as a science

According to Kautilya (pp. 105-6),“Traditionally, (i) philosophy, (ii) the three Vedas, (iii) economics and (iv) the science of government are considered to be the four branches of knowledge. [However,]

 

a) the followers of [the Arthashastra of Prachetasa] Manu say that there are only three branches – the three Vedas, economics and the science of government. For [to them,] philosophy is only a special branch of Vedic studies.

 

b) The School of Brihaspati considers only economics and politics to be true branches of knowledge; [they argue that] those experienced in the ways of the world use the Vedas only as a cover [in order to avoid the accusation of being materialistic atheists.]

 

c) The school of Ushanas, maintains that politics is the only science; because, they say, it is in that science all other sciences have their beginning and end.

 

Kautilya holds that there are, indeed, four branches of knowledge. Because one can know from these four all that is to be learnt about Dharma [spiritual welfare] and artha [material well-being], they are called ‘knowledge’. Philosophy is the lamp that illuminates all sciences; it provides the techniques for all action; and it is the pillar, which supports dharma.

 

Samkhya, Yoga and atheistic are schools of philosophy. One should study philosophy because it helps one to distinguish between dharma and adharma [evil] in the study of the Vedas, between material gain and loss in the study of economics and between good and bad policies in the study of politics. [Above all,] it teaches one the distinction between good and bad use of force. When the other sciences are studied by the light of philosophy, people are benefited because their minds are kept steady in adversity and prosperity and they are made proficient in thought, speech and action (1.2)”.

 

According to Kautilya,establishment of economics as a separate discipline does not mean its independence from other disciplines. That is, economics can provide to and receive inputs from other disciplines.

9.2 Economics and political science

Economics does provide inputs to political science but it does not receive any direct input from political science. For example, the king is supposed to carry out the cost-benefit analysis before undertaking a project, [Sanjeev: This is entirely missing from India's socialist policy making]  that is, economic concepts are used to improve the functioning of the government.

 

9.3 Political science and vedas (moral values)

According to Kautilya, it was the spiritual duty of a king to take care of his subjects. He expressed the need for both the citizens and the king to be ethical. He emphasized dharma (ethics) through out The Arthashastra. He wanted that a king be benevolent, and energetic public servant implying that he be guided by public interest and not by his self-interest.

9.4 Economics and vedas

According to Kautilya, unless the survival of the state was threatened, ethical values should set the boundaries for all endeavors including economic ones. He (p. 107) emphasized the basic dharmic (moral) duties of individuals as “Duties common to all: Ahimsa [abstaining from injury to all living creatures]; satyam [truthfulness]; cleanliness; freedom from malice; compassion and tolerance (1.3)”.

9.5 Anviksiki (philosophy) and economics

According to him, philosophy provide[s] the reasoning between ethical and unethical actions [and] sheds light on methodological issues in all branches of knowledge including economics. His goal was to strike a proper balance between material well-being and spiritual well-being.

9.6 Economic knowledge and public policy

Kautilya (p. 100) writes, ‘‘By following [the principles set out in] this treatise one cannot only create and preserve dharma [spiritual good], artha [material well-being] and kama [aesthetic pleasures] but also destroy [their opposites, i.e.] unrighteousness, material loss and hatred’.

 

He does not accept any point without sound reasoning. His scientific methodology blended with rich content sets him apart from his predecessors. 

 

The identification of wage, rent, profit and interest as different factor payments by his predecessors was remarkable. But Kautilya saw the role of land, labor and capital as sources of economic growth and thus provided a modern interpretation. Finances were always critical to the maintenance of any kingdom and therefore, some fiscal issues were discussed by his predecessors. However, Kautilya extended that in two directions that: there are limits to taxation and suggested that tax revenue be directed to the provision of infrastructure, which increased income and consequently to more tax revenue, that is, instead of increasing the tax rate, he suggested increasing the tax base.

 

Similarly law and order issues were considered critical to the stability of the kingdom and therefore, reducing criminal activity through punishment was discussed by pre-Kautilyan writers. But Kautilya (p. 377) added, ‘It is the power of punishment alone, when exercised impartially in proportion to the guilt, and irrespective of whether the person punished is the King’s son or an enemy, that protects this world and the next’. [Sanjeev: This is perfectly reflected in my insistence that freedom comes with accountability.]

 

Kautilya initiated the exploration of “science of man’. For example, He (p. 283) suggested, ‘The king shall have the work of Heads of Departments inspected daily, for men are, by nature, fickle and, like horses, change after being put to work (2.9).

 

A partial list of some important concepts contained in The Arthashastra is:

•  opportunity cost;
•  rudimentary demand and supply apparatus;
•  the law of diminishing returns;
•  externalities;
•  undesirability of monopoly and need for its regulation;
•  moral hazard;
•  role of law and order[14];
•  public goods;
•  Kautilya-curve (nowadays called Dupuit–Laffer curve);
•  producer surplus;
•  importance of human and physical capital accumulation to economic growth;
•  role of infrastructure to economic growth;
•  theory of gains from trade and terms of trade;
• principal-agent problem;
• efficiency wages;
• specification of explanation and prediction as the goals of an economic inquiry;
• role of asymmetric information in bargaining; and
• time inconsistency problem.

Kautilya synthesized and refined the existing ideas at his time. But his true genius lay in innovating the novel concepts.

9.7 A set of hypotheses proposed by Kautilya

He advances several hypotheses. A few of them may be listed here:

• human effort and capital accumulation are the sources of economic growth;
• heavy taxation leads to the erosion of tax base;
• prosperity changes peoples’ minds;
• information is the key to better decision making;
• justice and rule of law are the pre-requisites for economic growth; and
• consumer durable goods face unstable demand.

Kautilya’s Arthashastra declares economics as a distinct discipline. The Arthashastra considers economics as the “science of man” and contains a logically consistent and adequate core of economic knowledge.

Kautilya shows that Hindu-civilization has no intrinsic aversion to economic growth and there is no such thing as Hindu growth rate: The analysis in Kautilya’s Arthashastra dispels the myth that Hindu civilization is inimical to economic growth and also sheds some light on the ‘second generation’ economic reforms in India. Since it is essentially a treatise on the imperative of economic growth.

 

10. Conclusion

According to Kautilya, the scope of economics is very broad, more like that of postmodern era with some imperialistic tendencies of colonizing other disciplines. His methodology is essentially Marshallian: the use of partial equilibrium approach and the making of a distinction between the short-run and the long run. Kautilya recommended the use of optimization subject to constraints methodology. Also, discrete marginal analysis is discernible from his analysis. Adam Smith did not use either the marginal analysis or the ceteris paribus clause.

Kautilya was the first one, who wrote a treatise on economics, carried out brilliant synthesis of existing ideas, originated more than a score of basic concepts in economics, provided coherent interpretations and most importantly understood the economy as an inter-dependent system of various elements. 

Here's an extract from a publicly available source. The original source refers to a Table which I could not find. Could anyone with access please scan the table and send it to me?

Guest editorial, Humanomics, Volume 25, Issue 1.

More than 2,000 years ago, Vishnugupta Chanakya, wrote The Arthashastra – the science of wealth and welfare. It contains 150 chapters, which are distributed among 15 books.

The Arthashastra develops three interlinked and mutually complementary parts:

1. Arthaniti (economic policies) to promote economic growth;
2. dandaniti (administration of justice) to ensure judicial fairness; and
3. videshniti (foreign affairs policy) to maintain independence and to expand the kingdom.

Kautilya believed that the establishment of a rule of law, an impartial judicial system, and private property rights, devising an incentive mechanism to ensure efficient and honest government officials, encouraging dharma (ethics), the moral and spiritual rules of human behavior, provision of infrastructure and capital formation were the key ingredients for the creation of a prosperous, safe and secure nation.

 

Kautilya is an early pioneer of political economy before Adam Smith's The Wealth of Nations. It is not claimed that Kautilya provides any formal proofs or offers fully developed concepts or that The Arthashastra is as sophisticated as Samuelson's (1947) foundations. [Sanjeev: Balbir Sihag seriously over-rates the depressingly inadequate and misleading work of Samuelson.]  But it can be claimed that Kautilya's Arthashastra is much more pragmatic, more consistent, broader in scope and, analytically more rigorous than Adam Smith's Wealth of Nations. Despite the non-availability of modern analytical tools to him, his economic analysis was reasonably organized, adequately developed, and applied to a variety of problems.

 

The Arthashastra contains a sufficient number of coherent economic concepts and hypotheses and an inter-dependent system of relationships. Almost all of his insights, concepts, and methodology are relevant today.

 

The Arthashastra far removed from the heat of current controversies provides a clearer picture of universal human tendencies, such as risk-aversion, rent-seeking and greed and Kautilya recommends that society should tirelessly search for ways to reduce risk and contain excessive greed and rent-seeking activities.