The field of study that addresses the wealth of people, industries, and nations is known as economics. People who study economics are known as economists. They are concerned with questions of how wealth is created, how it is shared out, and how it is spent.

What an economy is

An economy is the part of society that creates wealth. Economists define wealth as a combination of what is created through agriculture and manufacturing. Without these types of products, there can be no wealth because there would be nothing to buy or sell.

Money is an important part of an economy, but it is not considered actual wealth. Money is not something that a person or country creates. Instead, money is a substitute for wealth that provides a method for exchanging products and services. Money allows for people to move goods through buying and selling.

One of the most important parts of an economy is labor. Labor is the physical activity of creating products, and therefore of creating wealth. In addition to producing goods, laborers (or workers) contribute to an economy by getting paid and buying other goods. Economists sometimes divide labor into two kinds: productive labor and nonproductive labor. Productive labor consists of jobs that create products. Nonproductive labor creates services that support the economy in other ways. Nonproductive laborers include doctors, teachers, and lawyers. In this case nonproductive does not mean “lazy.” Instead it means that these professions do not generally create wealth in the form of products.

Branches of economics

Economists use three major approaches to explore the wealth of people and nations. Microeconomics focuses on smaller units of study, such as individual consumers, companies, and industries. Macroeconomics looks at an entire economy and explores the relationships of all the goods created and sold, their prices, the labor it takes to create them, and more. Development economics deals with the forces that help an economy to grow, particularly in underdeveloped nations.

Aside from these major branches, economists explore a number of different areas of government and society to help them understand the economy. The study of public finance, for example, concerns itself with taxes. Monetary economics deals with government control over the money supply and its relationship to employment and other issues. International economics looks at trade among the nations of the world as well as changes in the value of each nation's currency. Labor economics looks at the supply of jobs, the demand for employment, and wages.

Management of economies

The word economy originally referred to household management. It comes from the Greek words oikos, meaning “household,” and nomos, meaning “rule” or “governance.” An important part of this definition is that an economy must be managed. For example, even in a household, people cannot keep buying new things if they do not have money coming in. The same is true of companies and societies.

People have to manage economies because the supply of resources is limited. The term resource applies to both natural resources (such as oil and wood) and artificial resources, which are created by people. If people allow a resource to be used up, there can be harmful effects on the economy and the society.

One important example of a limited resource is petroleum, or oil. Since the 1970s people have been increasingly aware that there is a limited supply of oil in the world. Oil is needed to power cars, heat homes, and run many different types of machines. As a result, the value of oil—its price—rises when its supply is not managed carefully. Managing the production and pricing of oil was vital to the economy of the entire world throughout much of the 20th century and remained so into the 21st. Many economists believe countries need to develop other energy sources because of the limited supply of oil.

Types of managed economies

There are three main ways of managing economies. An economy may be planned, unplanned, or a combination of the two. These types of management have shaped governments and the lives of people in countless ways. Much of 20th-century history can be viewed as a competition between those who believed in planned and unplanned economies.

In a planned economy, a government decides which goods are to be created and sold. The rulers of that government set priorities for all producers of wealth, and laborers must follow those rules. China has a planned economy, and the Soviet Union had one when it was a nation.

In an unplanned economy, the government does not determine the goods that are to be created or how they will be sold. This does not mean, however, that the government is not involved in the economy. It may make laws to protect the safety of workers, to stop the sale of harmful products, or to limit the amount of pollution from a particular industry. However, the government overseeing an unplanned economy does not generally tell people what they should produce, buy, or sell. The United States is one country with an unplanned economy.

Unplanned economies may sound like they cannot be managed, but this is not so. They are managed, just not by governments. Control over the economy rests with the marketplace. This term refers to the entire arena of economic activity, where goods are created, bought, and sold. The United States and many other countries believe that the marketplace can regulate itself. This type of economy is called a free-market economy, or capitalism.

A combination of planned and unplanned economies can be found in places such as Japan. In these partially planned economies, governments encourage certain industries to create goods, and they assist certain industries with money acquired through taxes.

Capitalism

In a capitalist economy, prices of goods and services are controlled by two forces: supply and demand. Supply refers to the amount of a particular product or service that is available in the marketplace. Demand refers to the level of desire for a product or service among buyers. If buyers wish to purchase more of a product or service than is available—that is, if demand is greater than supply—the suppliers of the product or service will raise its price. The opposite is also true. If buyers wish to purchase less than is available—that is, if supply is greater than demand—suppliers will lower the price.

Because a capitalist economy is free from government control, the marketplace alone determines the success of products and services. Capitalists therefore believe that individual initiative and ingenuity are key to economic success. A person or business with great ideas or products should be able to thrive in the marketplace. (See also capitalism.)

Rise of socialism

The main criticism of capitalism has been that wealth is not distributed evenly across the population. A small number of people are very rich, and another group is very poor. The large group in between (called the middle class) lives relatively well and accounts for most of the economy's working and spending. Starting in the late 18th century, many people began to call attention to these problems.

At the time, the economies and nations of the world were changing as a result of the Industrial Revolution. During this period machines began to be used to create products and help with agriculture. This change led to the creation of many factories, and many people were forced to work long hours. Workers fought to improve their conditions, and they often formed labor unions to help them sway government to make changes. The distance between laborers and business owners was getting larger.

The idea of planned economies arose when people decided that governments could help spread wealth more evenly and eliminate poverty by doing so. In Europe in the late 18th and early 19th centuries, a number of writers and protestors began to suggest changes in the ways economies were managed. These new methods would take power from the rich and give it to the workers, who created the most wealth in an economy but did not share evenly in that wealth. In addition, private property would be abolished entirely, with all goods distributed equally to everyone. This idea was known as socialism. (See also socialism.)

Communism

Communism is a type of socialism that grew out of the writings of two Germans, Karl Marx and Friedrich Engels. They believed that all of history was defined by struggles between two classes of people: workers and the rich people who owned the land and the businesses. Like other socialists, Communists proposed that private property be eliminated and wealth be distributed among the people. But Communists believed that revolution, or violent change, was necessary to bring about these changes. Marx and Engels called for the overthrow of governments to create Communist societies.

Marx and Engels did not see this type of society in their lifetimes, but it did come to pass in many parts of the world in the 20th century. The Russian Revolution of 1917 led to the overthrow of the government and the start of a Communist regime. Russia became the main part of a huge new country called the Soviet Union. After World War II (1939–45), the Soviet Union guided the spread of Communism to all of eastern Europe. Revolutions in China in 1949 and Cuba in 1959 led to the creation of Communist governments in those countries. Communism appeared to be on the rise, and it gave hope to many nations where the majority of people lived in poverty.

But Communism had its problems as well. These problems had much to do with the governments that put the Communist policies in place. Joseph Stalin, a violent dictator, ruled the Communist Party of the Soviet Union for about three decades. When he introduced Communist policies, many landowners resisted the taking away of their property and land. Stalin had them murdered. He also had his political rivals assassinated. It is believed that Stalin was responsible for the murder of millions of people during his leadership of the Soviet Union.

In addition, the government of the Soviet Union kept all power and wealth in the hands of a small number of Communist officials. Everyone else lived in relative poverty. This is precisely the problem that Marx and Engels believed that Communism would solve. Many basic freedoms, such as the freedom of religion and the freedom to leave the country, were outlawed in the Soviet Union.

Economists and historians who study the Soviet Union have considered two broad questions: Was there something wrong with Communism that led to the country's violent dictatorship? Or was the problem with the Soviet Union simply that its leaders were violent? The debate over these questions will continue for a very long time. Many people believe, however, that a nation cannot be Communist and be truly free. In fact, the Soviet Union began to fall apart in the mid–1980s when its leader, Mikhail Gorbachev, promised new freedoms for the people. These policies were an effort to revive the country's failing economy. (See also Communism.)

Economics as a field of study

Nations have always concerned themselves with the rise and fall of prices, labor, and other economic issues. However, economics as an area of study is only a few centuries old. Many historians credit a Scottish philosopher named Adam Smith with publishing the first major work of economics in 1776. His book was called An Inquiry into the Nature and Causes of the Wealth of Nations, which is sometimes abbreviated as The Wealth of Nations. In this book Smith supported a free-market system. He attacked policies that attempted to control the economy, instead arguing that an “invisible hand” guides the marketplace. In many ways, Adam Smith is the father of the theory of capitalism.

The study of economics evolved in the late 18th and 19th centuries. The British economist Thomas Malthus wrote An Essay on the Principle of Population (1798), which addressed the relationships among population and other economic factors. Malthus suggested that increases in population would make it difficult for the world to feed itself.

The year 1848 was a pivotal year in the history of economics. The British writer John Stuart Mill published his Principles of Political Economy. But few works of economics had greater impact than The Communist Manifesto by Marx and Engels, published that same year. Their ideas about the overthrow of capitalism affected economics and politics in the 20th century and beyond.

New schools of economic thought began to arise in the 19th and 20th centuries. As the 20th century began, many economists began to voice their dissatisfaction with certain problems in the free-market system. One of these problems was the growth of monopolies, or companies that control an entire industry.

John Maynard Keynes, another British economist, came up with new ways of exploring the relationship between a nation's wealth and its level of employment. Keynes believed that governments could control certain aspects of an economy to ensure full employment for everyone. His work The General Theory of Employment, Interest and Money (1935–36) was used as a model by many democratic governments that wanted to solve unemployment problems.

Advances in economics after Keynes largely focused on the use of mathematics to study economies. Out of these studies grew a new field called econometrics, which combined economic theories with math and statistics. The result was a greater ability to test new theories.