December 16, 2012
Economics reborn as science of wealth of nations
Economics as a separate social science discipline was the result of Adam Smith’s Wealth of Nations which, in 1776, identified contributions of land, labor and capital to a nation’s wealth. Surprisingly, an ancient term artha, connotes wealth of a nation. The science of artha was the subject matter of Kautilya’s Arthaśāstra (4th cent. BCE). This is a term used specifically in the context of a polity and is distinguished from another term, vasu which is a generic category meaning ‘wealth, goods, riches, property’. (A cognate term soṣpati refers to the divinity of wealth or property in Atharvaveda 1.12, a text perhaps 3000 years old).
Used in compound terms kimartham, for what purpose, why; yadartham for whom or which, the meaning of artha connotes ‘purpose’. In semantic expansion, the word artha also connotes an affair, business, matter, work, attainment of riches or worldly prosperity. This means identifies artha as one of the ends of human existence, the other three being dharma, kāma, mokṣa (ethics, desire, unity with paramātman). Thus, Arthaśāstra evolved as a discipline to deal with the affairs of the state for attainment of riches.
Capital as a factor of wealth attempts to define deployment of money in a time dimension. Money spent for the present consumption is distinguished from money deployed for productive use. The latter form of deployment of money is called mula. Mulam bhago vyaajee parighah klruptam rupikamatyayascaayamukham (Pretext of separating out and setting apart money as 1. surplus to current needs or 2. for generating profit). Thus, capital is that portion of money which is surplus to current consumption requirements and which is set apart for a productive use. Capital gets amplified as a set of factors which result in creation of a nation’s wealth: social capital as relationships (typically household or extended kinship in a group), state or corporation as forms of social organization and technological innovations. A term which denotes all these factors is tantram which means ‘scientific work, to rule, control, govern’ as in lokatantra ‘democracy’ or ‘regular order of the world, system, or framework’. This term is explained by the antonym āvāpah ‘serving specific each one of individuals or things as distinct from a regular order applicable to a group’.
One argument is that the Great Depression decade of 1920’s was caused by banking system creating over-indebtedness and deflation.[i] Irving Fisher recognized that credit cycles led to concentration of wealth which was not healthy. The argument was that over-indebtedness fueled speculation and asset bubbles. Today’s global economic crisis can also be explained by the same argument, this crisis further aggravated by the creation of a mythical balloon called derivatives which runs into over $300 trillion. What are sought to be risk-management tools may themselves end up being the risk and blow the balloon of the world monetary system of cataclysmic proportions. The solution suggested by the Chicago school of monetarists led by Irving Fisher is that the bank-created money should be withdrawn and the state alone should be the arbiter of money supply.
The Chicago PlanRevisited by Jaromir Benes and Michael Kumhof IMF Working paper WP/12/202 August 2012 suggests that crises created by excessive debt have been recorded in economic history right from the days of Solon of Greek history from 599 BCE. Facing a severe debt crisis of small farmers caused by the charging of interest on coinage by a wealthy oligarchy, Solon brought in successful reforms for a ‘financial good society’. Debts were cancelled, lands seized by creditor were restituted, agricultural commodities were monetized by setting floor prices. Solon issued debt-free coinage issued by government, thus reducing the need for private debts. Indian history also records the problems of usury right from the days of Rigveda and how the merchants were financed by debts issued by wealthy financiers.
Drawing the lessons from history, the basic suggestion is that lenders are forced to put up 100pc reserve backing for deposits, ban all derivatives in the financial market and the nation-state should regain full control over money supply.[ii] The solution suggested by two IMF monetarists, Jaromir Benes and Michael Kumhof, is sound and offers a dramatic solution to the crisis of excessive debts. Together with a ban on derivatives, the world economic development can be put on an even keel by strengthening the European Community and by forming the Indian Ocean Community.
[i] Fisher, Irving (October 1933). “The Debt-Deflation Theory of Great Depressions”. Econometrica (The Econometric Society) 1 (4): 337–357