The 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, natural resource endowment, and ecology, among other factors. These factors give context, content, and set the conditions and parameters in which an economy functions. An economy does not have to be a specific size. An economy can mean the economy of a city (local economy), a country (national economy) or the world as a whole (international economy), provided that it is involved in the production of goods and services.
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 word "economy" can be traced back to the Greek word "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.
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. 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.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.
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.
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 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.
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 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.
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.
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.
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 and designated as E2M  by founder Michael Garjian which creates the infrastructures that enable communities, as entities, to use the tool of capitalism to create significant amounts of community wealth. Under the E2M model, communities share in the equity of corporations which are then patronized by community members, thus creating income streams to the E2M Regional Economic Councils (E2M-REC) which act in the best interests of the regional community. Wealth earned by the community under E2M is then invested in additional business start-ups in which the E2M-REC owns even more equity. As the community wealth held by the E2M-REC grows, investments in businesses increase as well as social investments which can include, but are not limited to mortgages of 50 year terms and 1 percent interest rates, purchases of commercial and residential realty to be rented at stable rates over decades, and other investments based on the goal of achieving adequate profits and sustainable growth for the common good. This counterbalances the traditional investment goal of maximum profits and maximum growth for the private investor which is an unsustainable investment criteria that endangers the planet and those who inhabit it.
In modern economies, there are four main sectors of economic activity:
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.)
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.)
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.)
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.
There are a number of ways to measure economic activity of a nation. These methods of measuring economic activity include:
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.
See 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)