An economy or economic system consists of
the production, distribution or trade, and consumption of limited goods and services
by different agents in a given geographical location. The economic agents can be individuals,
businesses, organizations, or governments. Transactions occur when two parties agree
to the value or price of the transacted good or service, commonly expressed in a certain
currency. In the past, economic activity was theorized
to be bounded by natural resources, labor, and capital. This view ignores the value of
technology, and innovation, especially that which produces intellectual property.
A given economy is the result of a set of processes that involves its culture, values,
education, technological evolution, history, social organization, political structure and
legal systems, as well as its geography, natural resource endowment, and ecology, as main factors.
These factors give context, content, and set the conditions and parameters in which an
economy functions. The largest national economy in the Americas is the United States, Germany
in Europe, Nigeria in Africa and China in Asia.
A market-based economy is where goods and services are produced without obstruction
or interference, and exchanged according to demand and supply between participants by
barter or a medium of exchange with a credit or debit value accepted within the network,
such as a unit of currency and at some free market or market clearing price. Capital and
labor can move freely to any area of emerging shortage, signaled by rising price, and thus
dynamically and automatically relieve any such threat. Market based economies require
transparency on information, such as true prices, to work, and may include various kinds
of immaterial production, such as affective labor that describes work carried out that
is intended to produce or modify emotional experiences in people, but does not have a
tangible, physical product as a result. A command-based economy is where a central
political agent commands what is produced and how it is sold and distributed. Shortages
are common problems with a command-based economy, as there is no mechanism to manage the information
about the systems natural supply and demand dynamics. Range
Today the range of fields of study examining the economy revolve around the social science
of economics, but may include sociology, history, anthropology, and geography. Practical fields
directly related to the human activities involving production, distribution, exchange, and consumption
of goods and services as a whole, are engineering, management, business administration, applied
science, and finance. All professions, occupations, economic agents
or economic activities, contribute to the economy. Consumption, saving, and investment
are variable components in the economy that determine macroeconomic equilibrium. There
are three main sectors of economic activity: primary, secondary, and tertiary.
Due to the growing importance of the financial sector in modern times, the term real economy
is used by analysts as well as politicians to denote the part of the economy that is
concerned with actually producing goods and services, as ostensibly contrasted with the
paper economy, or the financial side of the economy, which is concerned with buying and
selling on the financial markets. Alternate and long-standing terminology distinguishes
measures of an economy expressed in real values, such as real GDP, or in nominal values.
Etymology The English words “economy” and “economics”
can be traced back to the Greek word οἰκονόμος, a composite word derived from οἶκος
and νέμω by way of οἰκονομία. The first recorded sense of the word “economy”
is in the phrase “the management of œconomic affairs”, found in a work possibly composed
in a monastery in 1440. “Economy” is later recorded in more general senses, including
“thrift” and “administration”. The most frequently used current sense, denoting
“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, supplying
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.
The Babylonians and their city state neighbors developed forms of economics comparable to
currently used civil society concepts. They developed the first known codified legal and
administrative systems, complete with courts, jails, and government records.
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. 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.
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 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 and Giovanni di Bicci de’ Medici founded the first banks. The discoveries
of Marco Polo, Christopher Columbus and Vasco da Gama 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 trade.
Early 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 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 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 who was
inspired partly by the ideas of physiocracy, a reaction to mercantilism. 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 transferred the idea of supply and
demand to the problem of overpopulation. The Industrial Revolution was a period from
the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and
transport had a profound effect on the socioeconomic and cultural conditions starting in the United
Kingdom, then subsequently spreading throughout Europe, North America, and eventually the
world. The onset of the Industrial Revolution marked a major turning point in human history;
almost every aspect of daily life was eventually influenced in some way. In Europe wild capitalism
started to replace the system of mercantilism and led to economic growth. The period today
is called industrial revolution because the system of Production, production and division
of labour enabled the mass production of goods. 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 and Milton Friedman 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, 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 —brought up a new form of economy: mass consumption economy. In 1958
John Kenneth Galbraith was the first to speak of an affluent society. In most of the countries
the economic system is called a social market economy.
Late 20th – beginning of 21st century With the fall of the Iron Curtain and the
transition of the countries of the Eastern Block towards democratic government and market
economies the idea of the post-industrial society is brought into importance as its
role is to mark together the significance that the service sector receives at the place
of the industrialization, as well the first usage of this term, some relate it to Daniel
Bell’s 1973 book The Coming of Post-Industrial Society, while other – to social philosopher
Ivan Illich’s book Tools for Conviviality. The term is also applied in philosophy to
designate the fading of postmodernism in the late 90s and especially in the beginning of
the 21st century. But, the term came to common usage to describe the growth of economies
like the Chinese at the period. With the spread of Internet as a mass media
and communication medium especially after 2000-2001 the idea for the Internet and information
economy is given place because of the growing importance of ecommerce and electronic businesses,
also the term for a global information society as understanding of a new type of “all-connected”
society is created. In the late 00s the new type of economies and economic expansions
of countries like China, Brazil and India bring attention and interest to different
from the usually dominating Western type economies and economic models.
Economic phases of precedence The economy may be considered as having developed
through the following Phases or Degrees of Precedence.
The ancient economy was mainly based on subsistence farming.
The industrial revolution phase lessened the role of subsistence farming, converting it
to more extensive and mono-cultural forms of agriculture in the last three centuries.
The economic growth took place mostly in mining, construction and manufacturing industries.
Commerce became more significant due to the need for improved exchange and distribution
of produce throughout the community. In the economies of modern consumer societies
phase there is a growing part played by services, finance, and technology—the.
In modern economies, these phase precedences are somewhat differently expressed by the
three-sector theory. Primary stage/degree of the economy: Involves
the extraction and production of raw materials, such as corn, coal, wood and iron.
Secondary stage/degree of the economy: Involves the transformation of raw or intermediate
materials into goods e.g. manufacturing steel into cars, or textiles into clothing. At this
stage the associated industrial economy is also sub-divided into several economic sectors.
Their separate evolution during the Industrial Revolution phase is dealt with elsewhere.
Tertiary stage/degree of the economy: Involves the provision of services to consumers and
businesses, such as baby-sitting, cinema and banking.
Quaternary stage/degree of the economy: Involves the research and development needed to produce
products from natural resources and their subsequent by-products. Note that education
is sometimes included in this sector. Other sectors of the developed community include :
the Public Sector or state sector. the Private Sector or privately run businesses.
the Social sector or Voluntary sector. Economic measures
There are a number of ways to measure economic activity of a nation. These methods of measuring
economic activity include: Consumer spending
Exchange rate Gross domestic product
GDP per capita GNP
Stock Market Interest rate
Government debt Rate of Inflation
Unemployment Balance of Trade
GDP The GDP – Gross domestic product of a country
is a measure of the size of its economy. The most conventional economic analysis of a country
relies heavily on economic indicators like the GDP and GDP per capita. While often useful,
it should be noted that GDP only includes economic activity for which money is exchanged.
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. 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. See also Notes References
Aristotle, Politics, Book I-IIX, translated by Benjamin Jowett, Classics.mit.edu
Barnes, Peter, Capitalism 3.0, A Guide to Reclaiming the Commons, San Francisco 2006,
Whatiseconomy.com Dill, Alexander, Reclaiming the Hidden Assets,
Towards a Global Freeware Index, Global Freeware Research Paper 01-07, 2007, Whatiseconomy.com
Fehr Ernst, Schmidt, Klaus M., The Economics Of Fairness, Reciprocity and Altruism – experimental
Evidence and new Theories, 2005, Discussion PAPER 2005-20, Munich Economics, Whatiseconomy.com
Marx, Karl, Engels, Friedrich, 1848, The Communist Manifesto, Marxists.org
Stiglitz, Joseph E., Global public goods and global finance: does global governance ensure
that the global public interest is served? In: Advancing Public Goods, Jean-Philippe
Touffut,, Paris 2006, pp. 149/164, GSB.columbia.edu Where is the Wealth of Nations? Measuring
Capital for the 21st Century. Wealth of Nations Report 2006, Ian Johnson and Francois Bourguignon,
World Bank, Washington 2006, Whatiseconomy.com Further reading
Friedman, Milton, Capitalism and Freedom, 1962.
Galbraith, John Kenneth, The Affluent Society, 1958.
Keynes, John Maynard, The General Theory of Employment, Interest and Money, 1936.
Marx, Karl, Das Kapital, 1867. Smith, Adam, An Inquiry into the Nature and
Causes of the Wealth of Nations, 1776.