• Finnish: talous-
• Italian: economico

An economy is the realized system of human activities related to the production, distribution, exchange, and consumption of goods and services of a country or other area.

The composition of a given economy is inseparable from technological evolution, civilization's history and social organization, as well as from Earth's geography and ecology, e.g. ecoregions which represent different agricultural and resource extraction opportunities, among other factors. Economy refers also to the measure of how a country or region is progressing in terms of product.

Origins and Etymology

The word "economy" can be traced back to the word οικονομία, "one who manages a household", derived from οικος, "house", and νέμω, "distribute (especially, manage)". From οικονόμος 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 οικονομία 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.

History

The earliest economic activity centered around food gathering and animal hunting. During the Stone Age, which lasted until about 11000 years ago, early humans wandered in tribal or family groups, hunting animals for food and picking nuts, berries, and fruits where they could. All of this continued until an agricultural revolution occurred. Through a gradual process of thousands of years, people eventually domesticated wild plants and animals. This meant that people would then graze the animals like sheep and use them for their own needs. Humans could now have a reliable supply of food which in turn improved people’s lives and provided leisure time. This revolution could then be used to develop other activities, such as bureaucracy. The demands of crops and herding animals also encouraged people to remain in one location, so villages and towns began to develop. That was the first human economic activity as trading was first performed among people. The food grown by individuals now would not only be used to feed themselves, but if they had more than they needed they could trade for other needed equipment. Continued improvement in agricultural technology—such as the plough, the tractor and better farming techniques—led to even better lives for people. The new technology improved crop yields and food quality, and also resulted in better methods for storing, transporting, and selling food. One result of this technological change was that people had more time to do other things beside produce food. They could become craftspeople, working with metal wood or cloth. Or they could host other things, including teaching, developing laws, practicing medicine, or leading their growing communities. These new crafts and skills that people developed from the leisure time they created from the new farming techniques, generated jobs and money. For example metal workers could sell their products to farmers and they would either barter with food, or would trade with capital (money). The money would then keep flowing around the community and the economic activity would increase.

Modern Economic Activities—Industrial Revolution and Urbanization The modern era for economics started around 1700 A.D. It was that time when a second agricultural revolution took place. Farmers began to apply new scientific knowledge to producing food, especially through the use of machines and equipment. This drove the development of manufacturing, and the Industrial Revolution was underway in the 1800’s. This revolution dramatically changed economic activities. Huge numbers of people were no longer needed as food producers. Many moved from farms to cities to find work in the new factories that were springing in there. Cities became the focus of economic activity during the Industrial Revolution. Urbanization shifted the population from the countryside to the cities. Cities that were built on manufacturing grew and expanded. By the beginning of the 1900’s, more and more people were working jobs not related to agriculture and manufacturing. This created the different types of industries (primary, secondary, tertiary). These jobs were created to provide consumers in the cities with services such as entertainment, shops and stores, banking and insurance.

All these revolutions and changes in economic system have brought us to today’s economy. There are 4 types of economic systems: traditional, command, market and mixed. Economic systems is the way economy works. The 4 basic resources to an economy are land, labor, capital, and technology. Land refers to all natural resources that we use to make something such as minerals, energy, water, or land. Labor refers to human energy, efforts and talents that go towards making something. Capital is money— money invested in machinery, buildings and the like. Technology includes all resources that are not natural resources, such as scientific knowledge which allows decisions to made. These are the world’s economic systems: 1) Traditional economy is an economy in which decisions are made based on what has been done in the past. People organize their economic choices by following their religion, custom and tradition. An example of how traditional economy worked would be if there was a new road to be built, elders might be consulted and the decision would be made according to the tradition of the people. 2) Command economy is an economy where decisions are made by a central authority, such as dictator or a government. Citizens are required to carry out these decisions with few personal choices. An example would if a new industry was to built there, people in power decided if it fit into their plans and if it met their needs. The citizens of the country would have to carry out these commands. A country that follows this economic system is North Korea. 3) Market economy is an economy where decisions are made by all members of the society based on their own needs and desires. Citizens make their own choices through buying and selling in the market place. If a factory were to be constructed, decisions would be made by a corporation, based on whether or not profit could be made. The government might or might not be involved. A country that uses this type of an economic system is the United States. 4) In mixed economies decisions are made within a system that has aspects of both market and command economies. Governments, businesses and individuals are all included in the making of the decision. So, if there was an automobile manufacturing industry to be built there, the decision to construct a road would be made after discussions among governments, businesses and consumers. The decision would rest in the hands of any of these groups. Canada is an example of a mixed economy.

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 three main sectors of economic activity:

• Primary sector: 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: 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: 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: 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

Ancient times

The ancient economy was mainly based on subsistence farming. For most people the exchange of goods occurred through social relationships. There were also traders who bartered in the marketplaces. In Ancient Greece, when the word 'economy' arose, 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 firstly 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 (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.

Capitalism and communism

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". The exploitation of labour and nature by the capitalist is creating a surplus value. The capital will accumulate itself and finally destroy the competition. Therefore the system of communism should liberate the economy from the reign of capital. The first centrally planned economy was established after the Russian Revolution of 1917 by Lenin. Other states launched social security systems in order to minimize the effects of uncontrolled capitalism, called Manchester capitalism.

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: consumption. 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. Together the political, economic and cultural developments in the Western World since c. 1963 constitute what Robert Struble has called "the postmodernist revolution."

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.

Economic measures

There are 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

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.

See also

• Ecological economics
• Economics
• Economic system
• Economist
• Economic history (includes list by country)
• Primary sector of industry
• Secondary sector of industry
• Tertiary sector of industry
• Quaternary sector of industry

Endnotes

References

• Aristotle, Politics, Book I-IIX, translated by Benjamin Jowett http://classics.mit.edu/Aristotle/politics.html
• Barnes, Peter, Capitalism 3.0, A Guide to Reclaiming the Commons, San Francisco 2006 http://whatiseconomy.com/joomla/index.php?option=com_content&task=view&id=29
• Dill, Alexander, Reclaiming the Hidden Assets, Towards a Global Freeware Index, Global Freeware Research Paper 01-07, 2007 http://whatiseconomy.com/joomla/index.php?option=com_content&task=blogcategory&id=15&Itemid=31
• Fehr Ernst, Schmidt, Klaus M., The Economics Of Fairness, Reciprocity and Altruism - experimental Evidence and new Theories, 2005, Discussion PAPER 2005-20, Munich Economics http://whatiseconomy.com/joomla/index.php?option=com_content&task=view&id=29
• Marx, Karl, Engels, Friedrich, 1848, The Communist Manifesto http://www.marxists.org/archive/marx/works/1848/communist-manifesto/index.htm·
• 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, (ed.), Paris 2006, pp. 149/164. http://www2.gsb.columbia.edu/faculty/jstiglitz/download/2006_Global_Public_Goods.pdf
• 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. http://whatiseconomy.com/joomla/index.php?option=com_content&task=view&id=29

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.
• Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
• Nobelpricewinner Prof. William Vickrey: 15 fatal fallacies of financial fundamentalism-A Disquisition on Demand Side Economics

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