What is an Economy?

November 21, 2020

This article is intended as a basic primer for understanding of what an economy is, the key features of different economic systems and laying a foundation for thinking about economic vision.


Human beings are a social species. Throughout history people have created social institutions in order to help meet their needs and desires. In addition to creating economic institutions to meet material needs and desires, people have organised community institutions for addressing our cultural and spiritual needs, gender or kinship systems for satisfying our sexual needs, family relations and organising our parental functions, and political systems for mediating conflicts and creating laws.

Institutions are important in society in helping us to meet our needs, and the way we arrange them will determine what choices and roles are available to us and how the benefits and burdens are distributed to people in a society.

While important, the economy forms only one aspect of society, and that privileged and disadvantaged groups and hierarchies can emerge from any area of social activity whenever the burdens and benefits of social cooperation are not distributed equitably.

What is an economy?

An economy is a system for organising the production, distribution and consumption of goods and services. This involves work being carried out by workers in offices, factories, farms, etc, to produce goods and services that are distributed to others to consume. Different ways of arranging these functions will result in different outcomes regarding the distribution of rewards and responsibilities, the balance of work versus leisure, the quality of our work lives, and so on.

Any economy needs to address a few basic questions regarding how it organises production, consumption and distribution:


Who has control over the land, natural resources, equipment, tools and buildings which are used to produce goods and services? This is often referred to as ‘the means of production’ or ‘productive property’. This only includes assets used in the economy, not people’s personal possessions. Productive property can either be owned by private individuals, by the state, or “collectively,” i.e. by everyone.

Division of tasks

How are tasks divided and who will do them? Tasks are grouped together and assigned to workers as jobs. Tasks vary in their desirability, quality of life circumstances and empowerment effects on the person carrying out the work. Tasks can be grouped together in a hierarchical fashion or balanced to provide everyone with access to empowering and fulfilling work while sharing less desirable tasks fairly.

Decision making

Who makes decisions in the workplace, in communities, and how are decisions made? Decisions can be made by an authority by a top down hierarchy; by negotiations by buyers and sellers who disenfranchise all external parties; or, in a truly democratic way where all have decision making input in proportion to how much they are affected.


On what basis should people be compensated for what they do? The total social product of goods and services is divided up for people to use as consumption rights in the form of income. How the social product is divided up can be based on the value of what each person’s productive property produces, by how much value each person themselves produce, by the personal sacrifice or effort a person chooses to make, or by what meets each person’s special needs.


How will productive resources be allocated to workplaces to use and how will goods and services be distributed to consumers? Different systems for allocating resources and final goods include: markets (competitive bidding between buyers and sellers), central planning (a planning board decides on a comprehensive plan for the entire economy), democratic planning (consumers and workers democratically negotiate a comprehensive plan).

Institutions and Values

A social institution can be defined as a set of roles and responsibilities which establish expected patterns of behaviour. For example, in a workplace, the institution is not the physical building or the equipment used; the institution consists of the roles of the workers, managers, stockholders, etc. and the relationships between them.

Before creating institutions to carry out economic functions, it is important to think about what values we want to achieve regarding economic outcomes. The values can be considered as the moral principles which underpin our economy or the goals that we want to reach. We can use values for evaluating the desirability of any economic system. For example:

  • Self-Management – decision making say in proportion to the degree one is affected
  • Justice – reward for effort or personal sacrifice
  • Solidarity – concern for the well-being of others
  • Diversity – the flourishing of a variety of lifestyles and outcomes
  • Efficiency – meeting our goals by not wasting our limited time and resources
  • Sustainability – protecting and nurturing our natural environment

It is important to be specific and clear about what we mean by our goals or values in order to avoid unnecessary disagreements or ambiguity, and to help us determine what institutions we will best fulfil them.

Economic Systems

The three main economic systems we will compare below are capitalism, centrally planned socialism, and a participatory economy. Provided is a brief description of each with a table of comparisons to help the reader gain a ‘bigger picture’.


Capitalism is a system where what goods and services are produced, how they are produced, and who gets to consume them is determined by market exchanges where private individuals own productive property. Within a workplace a small group of people do the empowering and relatively pleasant tasks, while all the dangerous, tiring and boring tasks are done by everyone else.

The same people who monopolise the empowering tasks have more decision making power, giving orders to those below them in the organisational hierarchy. Peoples’ incomes are based on whether they own property or not, how much their labor contributes toward output, and how much bargaining power they have in negotiating their wage.

Ownership of Productive PropertyPrivate
Division of tasksHierarchical
Decision makingAuthoritarian
CompensationOwnership, contribution to output, and power

Centrally planned socialism

Centrally planned socialism is a system where technocrats in a central planning board gather information regarding production possibilities from workplaces and information about consumers’ demand for different goods and services. They then calculate an economic plan that ideally would maximize consumer satisfaction given the resource and technological constraints the economy faces.

Ownership of the natural, labour and human capital is under the control of this central planning board, which is, in turn, part of the state. Internally workplaces are organised much like a capitalist corporation with a few people at the top monopolising the empowering jobs and better working conditions. Subordinates do the disempowering, dangerous, and unpleasant work. Just as the central planning board orders plant managers what to produce and how to produce it, plant managers tell workers what to do, leaving workers with little or no decision making opportunities.

In theory workers in centrally planned economies could be rewarded in any number of different ways. However, in practice all centrally planned economies during the twentieth century gravitated toward compensation based on contribution toward output, and those in the managerial and central planning bureaucracies rewarded themselves particularly well.

FeatureCentrally Planned Socialism
Ownership of Productive PropertyState
Division of tasksHierarchical
Decision makingAuthoritarian
CompensationContribution toward output and privilege
AllocationCentral planning

A Participatory Economy

In a Participatory Economy there are workers and consumer councils where participants have decision making say in proportion to how much they are affected. Productive capital and resources are owned by everyone in society with everyone having an equal stake and say in how capital and resources are used.

Worker and consumer councils and federations make, revise, and approve self-activity proposals for the following year through a democratic planning procedure designed to yield a plan that is efficient, fair, and environmentally sustainable.

Work is shared out as balanced jobs where workers specialise while sharing work that no one wants to do. Workers are compensated according to their effort or personal sacrifice, as determined by their co-workers; the harder or longer a person works the more compensation they receive and vice versa. Compensation is also awarded to those with special needs as well as those who cannot work for a variety of reasons.

FeatureParticipatory Economy
Ownership of Productive PropertySocial
Division of tasksBalanced Jobs
Decision makingSelf-Management
CompensationEffort and Sacrafice
AllocationDemocratic Participatory Planning

Comparison Table of systems and institutions

The table below shows the institutions of each economy together for quick comparison.

FeatureCapitalismCentrally Planned SocialismParticipatory Economy
Ownership of Productive PropertyPrivateStateSocial
Division of tasksHierarchicalHierarchicalBalanced Jobs
Decision makingAuthoritarianAuthoritarianSelf-management
CompensationOwnership, contribution to output, and powerOutput and privilegeEffort and Sacrafice
AllocationMarketsCentral PlanningDemocratic Particpatory Planning

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