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Origins and etymology
The word "economy" can be traced back to the 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
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:
- 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.[1] 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."[2]
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 the economy
- Secondary sector of the economy
- Tertiary sector of the economy
- Quaternary sector of the economy
Endnotes
- ^ Robert Reich, Supercapitalism: the Transformation of Business, Democracy and Everyday Life (New York: Alfred A. Knopf, 2007)
- ^ Robert Struble, Jr., Treatise on Twelve Lights, (2007-08 ed.), chapter one, subsection entitled "the postmodernist revolution."
References
- Aristotle, Politics, Book I-IIX, translated by Benjamin Jowett [1]
- Barnes, Peter, Capitalism 3.0, A Guide to Reclaiming the Commons, San Francisco 2006 [2]
- Dill, Alexander, Reclaiming the Hidden Assets, Towards a Global Freeware Index, Global Freeware Research Paper 01-07, 2007 [3]
- Fehr Ernst, Schmidt, Klaus M., The Economics Of Fairness, Reciprocity and Altruism - experimental Evidence and new Theories, 2005, Discussion PAPER 2005-20, Munich Economics [4]
- Marx, Karl, Engels, Friedrich, 1848, The Communist Manifesto [5]·
- 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. [6]
- 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. [7]
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
