An
economy is the ways in which people use their environment to meet their material needs. It is the realized economic system of a country or other area. It includes the
production,
exchange,
distribution, and
consumption of
goods and services of that area. The study of different types and examples of economies is the subject of
economic systems. A given economy is the end result of a process that involves its
technological evolution,
history and
social organization, as well as its
geography,
natural resource endowment, and
ecology, among other factors. These factors give context, content, and set the conditions and parameters in which an economy functions.
Today the range of fields of study exploring, registering and describing the economy or a part of it, include
social sciences such as
economics, as well as branches of
history (
economic history) or
geography (
economic geography). Practical fields directly related to the human activities involving production, distribution, exchange, and consumption of goods and services as a whole, range from
engineering to
management and
business administration to
applied science to
finance. All kind of
professions,
occupations,
economic agents or economic activities, contribute to the economy.
Consumption,
saving and
investment are core variable components in the economy and determine market equilibrium. There are three main sectors of economic activity:
primary,
secondary and
tertiary.
The English words "economy" and "economics" can be traced back to the Greek words
οἰκονόμος "one who manages a household" (derived from
οἴκος "house", and
νέμω "distribute (especially, manage)"),
οἰκονομία "household management", and
οἰκονομικός "of a household or family". The first recorded sense of the word "economy", found in a work possibly composed in 1440, is "the management of economic affairs", in this case, of a monastery. Economy is later recorded in more general senses including "thrift" and "administration". The most frequently used current sense, "the economic system of a country or an area", seems not to have developed until the 19th or 20th century.
History
Ancient times
As long as someone has been making and distributing goods or services, there has been some sort of economy; economies grew larger as societies grew and became more complex.
Sumer developed a large scale economy based on
commodity money, while the
Babylonians and their neighboring
city states later developed the earliest system of
economics as we think of, in terms of rules/laws on
debt, legal contracts and law codes relating to business practices, and private property.
[Sheila C. Dow (2005), "Axioms and Babylonian thought: a reply", Journal of Post Keynesian Economics 27 (3), p. 385-391.] This was the beginning of the
price system as is known today, when it was formalized.
The Babylonians and their city state neighbors developed forms of economics comparable to currently used civil society (law) concepts.
They developed the first known codified legal and administrative systems, complete with courts, jails, and government records.
Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records and other pursuits. Ways to divide private property, when it is contended... amounts of interest on debt... rules as to property and monetary compensation concerning property damage or physical damage to a person... fines for 'wrong doing'... and compensation in money for various infractions of formalized law were standardized for the first time in history.
The ancient economy was mainly based on
subsistence farming. The
Shekel referred to an ancient unit of weight and currency. The first usage of the term came from
Mesopotamia circa 3000 BC. and referred to a specific mass of
barley which related other values in a
metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of
currency and a unit of weight... just as the British Pound was originally a unit denominating a one pound mass of silver.
A 640 BC one-third stater coin from Lydia, shown larger.
According to
Herodotus, and most modern scholars, the
Lydians were the first people to introduce the use of gold and silver coin. It is thought that these first stamped
coins were minted around 650-600 BC. A stater coin was made in the stater (trite) denomination. To complement the stater, fractions were made: the trite (third), the hekte (sixth), and so forth in lower denominations.
For most people the exchange of goods occurred through social relationships. There were also traders who bartered in the marketplaces. In
Ancient Greece, where the present English word 'economy' originated, many people were
bond slaves of the
freeholders. Economic discussion was driven by
scarcity.
Aristotle (384-322 B.C.) was the first to differentiate between a
use value and an
exchange value of goods. (Politics, Book I.) The
exchange ratio he defined was not only the expression of the value of goods but of the relations between the people involved in
trade. For most of the time in history economy therefore stood in opposition to institutions with
fixed exchange ratios as
reign,
state,
religion,
culture, and
tradition.
Middle ages
In
Medieval times, what we now call economy was not far from the subsistence level. Most exchange occurred within social groups. On top of this, the great conquerors raised
venture capital (from
ventura, ital.;
risk) to finance their captures. The capital should be refunded by the goods they would bring up in the
New World. Merchants such as
Jakob Fugger (1459-1525) and
Giovanni di Bicci de' Medici (1360-1428) founded the first
banks. The discoveries of
Marco Polo (1254-1324),
Christopher Columbus (1451-1506) and
Vasco de Gama (1469-1524) led to a first
global economy. The first
enterprises were trading establishments. In 1513 the first
stock exchange was founded in
Antwerpen. Economy at the time meant primarily
tradeEarly modern times
The European captures became branches of the
European states, the so-called
colonies. The rising
nation-states
Spain,
Portugal,
France,
Great Britain and the
Netherlands tried to control the trade through
custom duties and
taxes in order to protect their national economy. The so-called
mercantilism (from
mercator, lat.:
merchant) was a first approach to intermediate between private wealth and
public interest.
The
secularization in Europe allowed states to use the immense property of the church for the development of towns. The influence of the
nobles decreased. The first
Secretaries of State for economy started their work.
Bankers like
Amschel Mayer Rothschild (1773-1855) started to finance national projects such as wars and
infrastructure. Economy from then on meant national economy as a topic for the economic activities of the
citizens of a state.
The industrial revolution
The first
economist in the true meaning of the word was the Scotsman
Adam Smith (1723-1790). He defined the elements of a national economy:
products are offered at a
natural price generated by the use of
competition -
supply and demand - and the
division of labour. He maintained that the basic motive for
free trade is human
self interest. The so-called
self interest hypothesis became the
anthropological basis for economics.
Thomas Malthus (1766-1834) transferred the idea of supply and demand to the problem of
overpopulation. The
United States of America became the place where millions of
expatriates from all European countries were searching for free
economic evolvement.
In Europe wild
capitalism started to replace the system of
mercantilism (today:
protectionism) and led to
economic growth. The period today is called
industrial revolution because the system of
production and
division of labour enabled the
mass production of
goods.
Communism and its view of capitalism
Starting in
England, simultaneous related processes of mechanization, and the enclosures of the commons, led to increases in wealth for the controllers of capital, and mass
poverty,
starvation,
urbanization and
pauperization for much of the population. This led some, such as
Karl Marx (1818-1883) and the German industrialist and philosopher
Friedrich Engels, (1820-1895) to describe economy as the "system of capitalism".
Capitalism is characterized by the division of labor between worker and capitalist, in which the
means of production are separated from the direct producers and are instead owned by a parasitical capitalist class. Marx and Engels believed that under capitalism, the working class produces
surplus value, of which only a small percentage is returned to workers in the form of wages to provide for their bare subsistence. The rest of the surplus value is kept as profit, and is reinvested into the
commodity cycle by the capitalist. The competitive forces of the market will drive
capital to constantly
accumulate "for the sake of more accumulation", resulting in monopolies,
economic crisis and
imperialism.
Marx and Engels viewed capitalism as a historically-specific mode of production, as with feudalism and
hunter-gatherer societies, embedded with its own internal contradictions. Capitalism is the first mode of production in which the direct producers have no control over their conditions of labour or the means of production.
The declining living conditions of the
working class would drive workers to collectively fight back as part of a
class struggle, eventually overthrowing the capitalist state in a proletarian revolution and establishing a democratically planned economy, in which production is controlled by the direct producers themselves - the
proletariat - in order to satisfy human needs, not accumulation of profits. Thus in the
Communist Manifesto, Marx and Engels state that capitalism, in bringing to existence an urbanized working class, has created its own "gravediggers", as well as the material conditions and abundance ripe for a classless socialist society.
The first
centrally planned economy was established after the
Russian Revolution of 1917, led by the
Bolshevik Party, in which production was organized around workers' councils called
soviets. Similar councils of democratically elected recallable worker delegates have existed in subsequent revolutions and revolutionary situations throughout the 20th Century, including the 1936
Spanish Revolution, the 1974
Carnation Revolution in Portugal, the 1979
Iranian Revolution and the 1980
Solidarity uprising in Poland.
After World War II
After the chaos of two
World Wars and the devastating
Great Depression, policymakers searched for new ways of controlling the course of the economy. This was explored and discussed by
Friedrich August von Hayek (1899-1992) and
Milton Friedman (1912-2006) who pleaded for a global
free trade and are supposed to be the fathers of the so called
neoliberalism. However, the prevailing view was that held by
John Maynard Keynes (1883-1946), who argued for a stronger control of the
markets by the state. The theory that the state can alleviate economic problems and instigate economic growth through state manipulation of aggregate demand is called
Keynesianism in his honor. In the late 1950s the economic growth in America and Europe—often called
Wirtschaftswunder (ger:
economic miracle) —brought up a new form of economy:
mass consumption economy. In 1958
John Kenneth Galbraith (1908-2006) was the first to speak of an
affluent society. In most of the countries the economic system is called a
social market economy.
Postmodern economy
What economist
Robert Reich terms, "the not quite golden age" (WW II to the mid-1970s) gave way to the current global economy, or
supercapitalism. This economic revolution took place in tandem with a radical transformation of Western cultures, and the growth of oligarchical/plutocratic tendencies within the polities of Western democracies.
Discussion of such issues as the politics of the
World Bank, the
World Trade Organization and global players within the
World Economic Forum, as well as global
ecology and
sustainability, have all influenced the definition of
economy.
Joseph E. Stiglitz has defined economy to be a
global public good.
Economists like
Peter Barnes and Alexander Dill are reclaiming the
commons and providing definitions that embrace new phenomena like
freeware.
Game theorists such as
Ernst Fehr and Klaus M. Schmidt are contradicting the notion of omnipresent economic self-interest. Under the
gift economy extensive
grassroot movements have arisen; also the credit programs of Nobel laureate
Muhammed Yunus. In 2006 the
World Bank started issuing its
Wealth of Nations Report, tracking
social and
human capital.
Economists Gibson-Graham, J.K. (2006) in
A Postcapitalist Politics, University of Minnesota Press, pp. 181, ISBN 0816648042, describe a model of community capitalism described at
E2m.org.
Technocracy Incorporated proposes a non-monetary economic system based on
Energy Accounting,
for a
science-based social design. This non-political governmental system based on
thermoeconomics, uses energy accounting in a
non-market economics method based on science principles.
Economic sectors
The economy includes several sectors (also called
industries), that evolved in successive phases.
In modern economies, there are four main sectors of economic activity:
- Primary sector of the economy: Involves the extraction and production of raw materials, such as corn, coal, wood and iron. (A coal miner and a fisherman would be workers in the primary sector.)
- Secondary sector of the economy: Involves the transformation of raw or intermediate materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in the secondary sector.)
- Tertiary sector of the economy: Involves the provision of services to consumers and businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the tertiary sector.)
- Quaternary sector of the economy: Involves the research and development needed to produce products from natural resources. (A logging company might research ways to use partially burnt wood to be processed so that the undamaged portions of it can be made into pulp for paper.) Note that education is sometimes included in this sector.
More details about the various phases of
economic development belong to the history section on this article. As this process was far from being homogeneous geographically, the balance between these sectors differs widely among the various regions of the world.
Other sectors include the
Economic measures
There are a number of ways to measure economic activity of a nation. These methods of measuring economic activity include:
GDP
The
GDP - Gross domestic product of a country is a measure of the size of its economy. While often useful, it should be noted that GDP only includes economic activity for which money is exchanged. GDP and
GDP per capita are widely used by both specialized and non-specialized literature.
Informal economy
An informal economy is economic activity that is neither taxed nor monitored by a government, contrasted with a formal economy. The informal economy is thus not included in that government's
Gross National Product (GNP). Although the informal economy is often associated with
developing countries, all economic systems contain an informal economy in some proportion.
Informal economic activity is a dynamic process which includes many aspects of economic and social theory including exchange, regulation, and enforcement. By its nature, it is necessarily difficult to observe, study, define, and measure. No single source readily or authoritatively defines informal economy as a unit of study.
The terms "under the table" and "off the books" typically refer to this type of economy. The term
black market refers to a specific subset of the informal economy. The term "informal sector" was used in many earlier studies, and has been mostly replaced in more recent studies which use the newer term.
Micro economics are focused on an individual person in a given economic society and Macro economics is looking at an economy as a whole. (town, city, region)
See also
Endnotes
