Kautilya on institutions, governance, knowledge, ethics and prosperity

Abstract

Purpose Both researchers and policy makers have increasingly focused their energies in exploring the sources of economic growth. The purpose of this paper is to explore the very first ideas on the sources of economic growth of Kautilya during the fourth century BCE. Design/methodology/approach Kautilya's non‐technical statements on economic growth are presented as a formal model of economic growth. Findings Kautilya believed that institutions are a prerequisite to economic growth and good governance, knowledge, ethical conduct and economic growth are interdependent. That is, Kautilya believed in the virtuous cycle of economic growth. Research limitations/implications Kautilya's model of virtuous cycle implies that Kaufmann and Kraay specify an incorrect model to test the virtuous cycle model of economic growth. Practical implications Although it is a challenge to empirically estimate Kautilya's model if estimated appropriately, it could help in partitioning the Solow residuals into contributions made by technical progress and good governance towards economic growth. Originality/value The paper amounts to rewriting the history of economic thought.