Economy

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For the social science that studies it, see Economics. For other meanings see Economy
(disambiguation).

An economy is the realized social system of production, exchange, distribution, and

consumption of goods and services of a country or other area. A given economy is the end result
of a process that involves its technological evolution, civilization's history and social
organization, as well as its geography, resource endowment, and ecology, among other factors.
These factors give context, content, and set the conditions and parameters in which an economy
functions.

Origins and etymology

The word "economy" can be traced back to the Greek word οἰκονομία, "one who manages a
household", derived from οἴκος, "house", and νέμω, "distribute (especially, manage)". From
οἰκονόμος "of a household or family" but also senses such as "thrift", "direction",
"administration", "arrangement", and "public revenue of a state". 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 other senses shared by
οἰκονομία in Greek, 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.

Economic sectors
Main article: Economic sectors
The economy includes several sectors (also called industries), that evolved in successive phases.

• The ancient economy was mainly based on subsistence farming.

• The industrial revolution lessened the role of subsistence farming, converting

it to more extensive and monocultural forms of agriculture in the last three
centuries. The economic growth took place mostly in mining, construction
and manufacturing industries.

• In the economies of modern consumer societies there is a growing part

played by services, finance, and technology -- the (knowledge economy).

In modern economies, there are four main sectors of economic activity:[citation needed]

• 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 follow. As this process was far
from being homogeneous geographically, the balance between these sectors differs widely
among the various regions of the world.

History

[edit] Ancient times

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.[1]This was the beginning of the price system as is known today... when it was
formalized.[2]

The Babylonians and their city state neighbors developed forms of economics comparable to
currently used civil society (law) concepts.[3] 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.[1]

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.[4] It is thought that these first stamped coins were
minted around 650-600 BC.[5] 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.[citation needed] 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 firstly trade.
[edit] 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 (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.

[edit] 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.

[edit] 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 the worker in the form of
wages to provide for her 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 could alleviate economic problems
and instigate economic growth through state manipulation of aggregate demand is called
Keynesianism. 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..

[edit] 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.[6] 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. Together the
political, economic and cultural developments in the Western World since c. 1963 constitute what
Robert Struble has called "the postmodernist revolution."[7]

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.

Technocracy Incorporated proposes a non-monetary economic system based on Energy

Accounting,[8] for a science based social design.[9]This non political governmental system based
on Thermoeconomics, uses energy accounting in a Non-market economics method based on
science principles.[10]

[edit] 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
• Interest Rate
• National Debt
• Rate of Inflation
• Unemployment
• Balance of Trade

[edit] 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.

[edit] Informal economy

Main article: 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 a economy as a whole. (town, city, region)