Question:

The core economic problem has been described in your textbook as "the process of providing for the material well-being of society". Aristotle and Chanakya, approximate contemporaries during the BCE/BC period, wrote about the economic problem but analyzed it from totally contrasting perspectives.

Do you think that the socio-economic milieux and the institutional framework that they faced made them view the economic problem in fundamentally different ways?

Write a brief essay of about 600 (+) words explaining your own point of view about their ideas in the light of the question posed above.

Material to be used:

Book: Making of the Economic Society, The (13th Edition) (The Pearson Series in Economics)13th (Thirteenth) Edition by , William Milberg (Author)

PowerPoint extract 1:

Title: Aristotle, Markets, Economic Problem

_{Economic Problem in the BCE period}

Aristotle - Importance of Socio-Economic Interaction

• "Whenever Aristotle touched on a question of the economy, he aimed at developing its relationship to society as a whole at different levels. The frame of reference was the community as such, which exists at different levels within all functioning human groups." Karl Polanyi, Aristotle Discovers the Economy
• Emphasized that commodity exchange (fundamental to a market society and economy) could support or undermine individual virtue and social cohesion.

Role of society

• Depending on the social and institutional constraints and the motivation of the participants in the market mechanism and exchange, the community could prosper or disintegrate.
• Quite opposite to current theorizing that all market participants are similar - maximize utility or maximize profits
• In Aristotle, it depends very much on who the participants are and what they do, within the constraints laid down by law and custom
• Example: Why are gas prices high in Europe and US? Is it because oil companies are making 'supernormal profits' (and should pay a windfall tax)? Or is it because consumers refuse to change their habits at a time of international crisis?

Where are his ideas to be found

• Aristotle was a polymath, he was proficient in logic, physics, mathematics, philosophy
• Writing on Economics is not much, Book One of Politics and Chapter Five of Nicomachean Ethics
• But it was influential and influenced medieval economics analysis, as well as classical economists from Adam Smith to Karl Marx
• Today when we talk about the problems of monopoly capitalism, impact of hyper globalization, fair trade initiatives, we are thinking like Aristotle
• Schumpeter thought: Aristotle produced 'pompous common sense', but in many ways Aristotle was thinking like a modern economist - growth and welfare go hand in hand

Commodity Exchange and the Market

• Commodity exchange had to supplement society's needs outside direct production and appropriation
• Society comprises both households (oikos ) who may own agricultural property (slave labor in plantations outside the city) and the polis (ancient Hellenic city-states like Athens or Sparta)
• Families group together in the political community (polis) whose end is living well

Exchange and Money

• But society also needs a theory of supply, acquisition of the surplus of production and exchange
• The purpose of exchange is the pursuit of virtues
• Goodness, fairness and justice are virtues extolled by Aristotle
• Among which justice is highlighted as the 'complete virtue'
• Exchange requires some form of money since barter is inefficient
• But money should not be used to make more money
• Forbidding of usury (high interest rates)

Allocation and Distribution: Exchange

• Remember from our textbook MES, the three aspects of the economy: Production, Allocation, Distribution (PAD)
• He was mainly concerned with allocation of work, and distribution or exchange; this is because production was predetermined in a static society dominated by tradition and command economy

Needs and Wants

• Conceptually, there is a distinction between 'needs', 'wants' and 'desires'
• In a complex society with numerous goods which can be bought and sold, the tripartite distinction is valid.
• Needs are something you must have (food, clothing), want is something you wish to get (wealth, status) and desires are exceptional demands (I want to be a billionaire).
• In a traditional society like Athens in BCE, for most people they would wish to participate in market exchange and resolve the 'economic problem' by satisfying their needs and their wants.

Natural vs Unnatural Exchange

• Aristotle distinguished natural exchange from unnatural exchange based on individual needs and wants.
• He defined natural exchange as an exchange for the purpose of satisfying needs.
• Unnatural exchange, on the other hand, is the acquisition for the purpose of satisfying wants or for making profit
• Aristotle was worried about unnatural exchange because, once people establish the habit of making money for profit, they will engage in transactions where they will retain more and more surplus, and they will be tempted to multiply profits.
• Thus, the act of sharing excess with others will be compromised, which would leave an imbalance in society.

Concept of proportionality

• Property, goods and services must be exchanged proportionally for exchange to be considered just
• In natural exchange this will be so under normal circumstances (except maybe when there is fundamental disequilibrium like wars, famines, disasters)
• During a hurricane if water is scarce and a seller is charging extortionate prices (price gouging) then we have a violation of this concept and therefore that is unnatural exchange

Proportionality

• Getting supernormal profits at a time of scarcity is counter-proportionate and therefore unjust
• Remember to Aristotle justice is teleological - it must serve a purpose "what is just then is what is proportionate and what is unjust is counter proportionate"
• Correct proportionality depends on the relative power of the buyer and seller but also its customary price and the need for fairness

Miscellaneous

• Other Issues
• Scope of Economics
• Origin of the state
• Private Property is 'virtuous' since it gives incentives to owners to look after it
• Money is what money does
• Money is a Store of Value and Medium of Exchange
• Interest - Unjust and unnatural exchange, money should not reproduce itself; Consumption loans particularly unjust and unnatural
• Read carefully, only the section on Aristotle is important for the course, but the rest is interesting!
• https://www.economicsdiscussion.net/articles/economic-ideas-of-hebrews-plato-aristotle-and roman/20977

PowerPoint extract 2:

Chanakya or Kautilya: An economist from South Asia in the BCE period

_{The Economic Problem in the BCE period}

Who is Chanakya?

• Born in Taxila (modern day Pakistan) around 375 BCE and died in Pataliputra (in eastern India) in 283 BCE (all dates are approximate)
• Similar time as Aristotle (384-322 BCE)
• Teacher, philosopher, economist, jurist and royal advisor
• Was the direct advisor, respected teacher and prime minster of the Indian emperor Chandragupta Maurya
• Again, similar to Aristotle's relationship with Alexander - except that Chanakya was directly involved with state craft and administration
• Wrote a treatise called Arthashastra (science of economics or money)
• Similar to Chang's observation that Economics is not about choice and decision-making by individuals - it is about the economy per se

An image of how he may have looked like!

• https://en.wikipedia.org/wiki/Chanakya

Normative economics

• Unlike Aristotle who was a political philosopher, Chanakya was a political theorist and practioneer - interested in the real politic of statecraft (a bit like an ancient Machiavelli)
• Aristotle was a 'normative' economist
• How the price system and market mechanism should run according to some norms like fairness, goodness, and justice
• The market system is postulated to have some norms (or values) of conduct and the actual market exchange should obey these norms

Examples of normative economic principles

• Emphasize the difference between just and unjust exchange
• Difference between use value (based on needs) and exchange value (based on desires)
• Charging excessive prices during a shortage (say after a natural disaster) is an unjust exchange
• Extracting supernormal profits (much above the trend value) from basic needs like gas or food or heating is unjust exchange even though it maximizes profits
• Aristotle would have frowned on these activities since they violate a normative principle even though it may be necessary to curtail demand or increase supply in a modern economy

Positive Economics

• Positive economics is concerned with the development of positive statements about the world that are objective
• Positive economics statements should be empirically testable and verifiable by data
• When prices rise demand falls
• If there are shortages inflation will rise
• High (or low) taxation will stimulate economic growth
• Can you give other examples; press the chat button!

Chanakya and positive economics.

• Biggest difference between positive and normative economics often arises in taxation and in banking
• It is in these areas that we have major implicit norms of justice and fairness
• Chanakya was the prime minister of a king-emperor
• He was the Treasury Secretary (in today's language) with the interest of the President (in today's language) at heart
• He knew that an efficient state (government) is essential for the good of his boss
• For him, economic issues must have a positive dimension, its impact is measurable, its policy implementable.

Chanakya and the state (government)

• He was keen that the state had peace and prosperity, had a strong defense, could maintain domestic law and order, and the king's governance was seen to be fair and just (otherwise there would be a rebellion)
• But he was not interested in market justice or fairness
• So, when it came to pricing, taxation, banking (money-lending) he was only looking at the economic problem from the ruler's point of view
• The state needed money for a large powerful army
• It does not matter whether taxation is fair or just or good
• It is necessary - so be it

What would Aristotle say?

What would Chanakya say?

• Consider the following hypothetical statement.
• A poor person needs to borrow money to put food on the table for his family
• They will then be able to work better (material provision relates to heath)
• They will then earn some money from wages
• They will return the borrowed money
• Should they pay a high rate of interest since money is scarce

Chanakya's economic ideas

• Mostly deals with government administration, taxation, borrowing and lending
• He was facing a growing economy and an expanding empire
• He was also directly involved with administration, a hands-on economist
• He was part of a rigid hierarchical system which allocated work and effort according to one's caste (or predesignated profession at birth)
• Thus, his focus was on efficiency rather than justice (as in Aristotle) or 'natural' exchange
• To him growth through acquisition, production and trade was vital

Economics of Chanakya

• His economic ideas were revolutionary for his times
• He emphasized on capital formation in a growing economy, by relaxing accepted economic principle
• For example, he advocated tax exemptions for agriculturists (the main producer of social surplus)
• Anyone who brings new land under cultivation for the first two years would get tax exemptions (which normally could be high because military spending was high as the empire grew)
• He advocated concessionary loans for productive purposes.
• He reduced or made duty-free those imports for useful goods

Interest rates

• Chanakya believed in interest rates to be relatively high so that people could be more productive through borrowing and lending
• Unlike Aristotle who condemned usury (excessive interest rates), Chanakya thought that if people paid more for loans then they would use these loanable funds for highly productive investment
• Also, higher interest rates would discourage frivolous consumption and encourage people to save more
• In a growing economy, savings was vital for resolution of the economic problem
• In modern language we would call it the theory of loanable funds
• Savings is supply of loanable funds; Investment is demand for loanable funds; interest rate is 'price' of loanable funds

Level of interest rates

• Chanakya defined a different rate of interest (RoI), depending on the use of funds. For non-commercial loans (basically for personal use) RoI is 15%, for low risk commercial loans it is 60%, for risky commercial loans it is 120% and further, for foreign trade, it is 240%.
• He recognized clearly that interest rate must contain a risk premium from the point of view of the saver
• Personal use loan has the lowest risk while foreign trade has the highest risk

More on Interest rates

• Also, the RoI is linked with the productivity and profitability of the loan
• Non-commercial loan makes least profit while foreign trade makes maximum profits
• RoI reflects these variations
• Interest rates and borrowing has three functions: provides liquidity; productivity of investment; risk premium
• Chanakya analyzed all three
• To him the most important variable in the economic problem is saving, without it there is no growth
• In many respect he was thinking like a modern economist

Difference between the two savants

• Aristotle and Chanakya lived at the same BCE era
• They were both polymaths and thinkers with Aristotle being a great scientist and Chanakya being a great social scientist
• But their economic ideas were fundamentally different
• Aristotle was concerned about the market and about just price within a natural exchange
• Chanakya was concerned about the power of the state, economic growth and the saving investment nexus
• What is the fundamental reason for this major difference

Difference between the two savants

• Firstly, the state of the economy
• With Aristotle it is about managed decline and preservation of fairness, justice, social cohesion
• With Chanakya it is about an expanding empire and the 'go for growth' syndrome
• Secondly, their professional competence
• With Aristotle, he was a philosopher first and foremost
• With Chanakya, he was an administrator first and foremost
• Thirdly. Most important was the institutional framework within which they operated

Role of Institutions in resolving the Economic Problem

• The economic environment (such as growth versus stability) affects the institutions that bind societies together and gives it the appropriate direction
• The opposite is also true
• Aristotle operated within a relatively free democratic system where the male citizens (though not the slaves) had some fundamental rights
• Social cohesion came from the social contract
• Goodness, Fairness and Justice (implicit norms) held society together

Role of institutions

• Chanakya was prime minster of an autocratic imperial state
• Government regulation to control markets were of fundamental importance
• Economic growth created prosperity and that gave the monarchy its legitimacy
• Justice, morality, fairness were not major issues
• Economic growth was paramount

Policies in resolving the Economic Problem

• Both of these early economists understood the 'law of supply and demand'
• They both realized that inflation resulted from lack of supply or excessive demand (as we observe today)
• But Aristotle wanted to resolve this problem by appealing to norms of fairness, justice and goodness
• Aristotle detested usury, where money creates money
• "The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural."

Policies

• Chanakya was prime minster of an autocratic imperial state
• Government regulation to control markets were of fundamental importance
• Economic growth created prosperity and that gave the monarchy its legitimacy
• Justice, morality, fairness were not major issues
• Economic growth was paramount
• Usury (charging high interest rate for scarce capital) was desirable because interest rate was the 'price' of money
• It (interest rate or price) is high when demand for finance is higher than supply