08/19/2013 10:49 am ET Updated Oct 19, 2013

Politics, Economics and Indian Imperialism

Waging war in ancient India was complicated business. Brilliant political strategist Chanakya decided to write a treatise, called the arthashashtra, which touched upon ideas of foreign policy, the imperial court, capturing fortresses, and even economics to help kings with their tricky travails. Aside from Sun Tzu's similarly-themed The Art of War, this is one of the oldest books that you can get your hands on.

Of course, the most interesting chapter of the text is the one on political alliances. Chanakya was a stark pragmatist, perhaps influenced by the dawning of the Buddhist period in India and the doctrines of moderation that religious scholars preached. Even so, Chanakya managed to infuse alliance-making tactics with his own brand of crafty and ruthless diplomacy.

For example, suppose you are a weak king situated near two more powerful ones. It is a risky bet to attempt to attack either of the kings, but Chanakya would suggest that you can purchase insurance against your loss. Adopt a double policy, where you make peace with one of the kings and attack the other. If you fail, your allied king is obliged to come to your aid and help you recover at his own expense.

You also desire to command the large army of your allied king to help you attack. If Chanakya were a financial analyst, he would compare this to pooling resources to act as a large limited partnership, so that you can invest in high-yield areas like private equity. However, in his day, there were barriers to such pooling of resources; for instance, the large neighboring kings could be on peaceable terms. But as an astute young leader, you can convince each of the fact that the other "is a tyrant" and thus divide the two.

It is imperative that you ally yourself with the more powerful king and wage war against the less powerful one, and if you find yourself in the opposite position, you must switch. As a risk-averse economic agent, you trade high risk and high potential gains for lower risk and lower potential gains, even if the expected value of your gains in both cases is the same. Chanakya would counsel you to be loose with your loyalties, but there's no sense in being a brazen fool.

Once you have the kings divided though, you may choose to befriend their "traitors, enemies, and wild chiefs." Although Chanakya doesn't lay it out explicitly, by now you've begun to understand how to develop battle tactics. You will attack the stronger king first, since you have amassed a truly formidable force with the implicit aid of the rival king. However, he dare not double-cross you, since you have the support of various enemy tribes and clans. But after succeeding in this massive acquisition, you will have grown so large that won't be worthwhile to attack the weaker king. Just as if you were acquiring a controlling stake in a corporation instead of an outright leveraged buyout, you subjugate his dominion as a vassal state.

Congratulations, Chandragupta Maurya. Through your Prime Minister Chanakya's guidance, you have become commander of the largest empire that ever existed on Indian soil, stretching from modern-day Sri Lanka to the border of Bactria. Your desire for power sated, you decide to turn your efforts to peacemaking and neutrality.

Chanakya was perhaps the first proponent of marginal utility theory. He proposes that "when, either in peace or war, [you] find neither loss to [your] enemy nor gain to [yourself, you] should, though superior, observe neutrality." Clearly, for this to function within the framework of marginal decision making, Chanakya makes it clear that loss to your enemy is necessarily a gain to yourself in a vindictive sort of way. He thereby levies a commentary on human nature; while economics only proposes that humans are self-interested agents, he seems to esteem the old Hammurabic code, "an eye for an eye." This was ancient India, after all, and if all your adversaries were down, you were effectively up.

Finally, once you've amassed large fortunes from plundering fortresses, you are considering attacking Samarkand, the prosperous Silk Road trading hub, as your final act before you cede the throne to your son. You realize that it will be a vast and lengthy undertaking, and you can easily raise the taxes on your subjects to help fill your coffers instead. However, just as a long-term bond offers a higher yield than a short-term one, Chanakya urges you to be patient and receive an even more favorable return on your expedition.

Though preceding him by over 1,800 years, Chanakya is often called the "Indian Machiavelli" for his political assertions. At the same time, it's important to note that artha, the root word of arthashastra, is Sanskrit for material prosperity. Maybe his statecraft was motivated by the very nascent beginnings of economics. Maybe war elephants aren't so different from financial derivatives after all.