The term economics comes from Greek and refers to house holding (from oikos household and nomia a set of norms or laws). Aristotle used it in the sense of administration of domestic matters. Only in the 17th century its use extended from the private sphere to the public one with the work of the first mercantilist economists where the term came to refer to the study of the features and economic problems of a nation state. This started the discussion on political economy.
A society's economic system is the social institution that coordinates human activity to pro- duce, distribute, and consume goods and services. Goods include any product that is extracted from the earth, manufactured, or grown such as food, clothing, petroleum, natural gas, automobiles, coal, and computers. Services include activities performed for others such as entertainment, transportation, financial advice, medical care, spiritual counseling, and education.
The term political economy would continue to be used in Smith's Wealth of Nations in 1776.Only later towards the end of the 18th century would the term economics as against political economy come into use. This was introduced in Britain and USA through Alfred Marshall's Principle of Economics in 1890 that tended to underline the autonomy of economics from politics and the distinction between scientific analysis and economic policy.
In Adam Smith's view economy and society and market and institutions were still closely related. He clearly believed that the pursuit of individual interest and the workings of the market would only conduct to the general good when they are constrained by precise institutional rules. Smith saw the study of these institutional constraints as an integral part of research into the causes of the wealth of nations. Economics and economic sociology were closely linked in his work.
Adam Smith published 'An inquiry into the nature and causes of the wealth of nations' in 1776.This text was basic to the formation of economics as a scientific discipline where he presents systematically presents laws on the functioning of the market in the production of goods and distribution of goods and the distribution of incomes. The book also examines the causes of wealth of nations or economic growth. The role of institutions is viewed as a given where as in dynamic part they are presented as a variable that can depending on their characteristics favor or discourage development.
Smith's work on static equilibrium presupposed that new wealth was not created but rather that existing wealth was used to satisfy needs. Capitalist institutions were taken as given. The land belonged to owners who lived on the profits and that workers depended on the sale of their work for a wage. He supposed that there were many sellers that information circulated freely and that the resources of capital and labor could be easily transferred from one use to another. In the institutional context the quantity of goods produced will tend to correspond to the demand that exists for such goods.
In the final analysis consumer demand will determine what is produced given the costs of production for each good. If the quantity of certain goods offered falls below demand price would increase as competition between buyers who wish to obtain the good drives them to pay more. As per the distribution of income it was also assumed that there was a particular market price for wages, profits and incomes. Wages tended to rise if the demand for labor was greater than supply and vice versa. Smith described a situation in which members of society were not rewarded for their participation in economic activity through traditional means of reciprocity or through legal regulation guaranteed by the power of the state redistribution as in the feudal system. Instead remuneration depended on the market and its laws.
The world's two major economic systems are capitalism and socialism. In capitalism, private citizens own the means of production and pursue profits. In socialism, the state owns the means of production and has no goal of profit. Adherents of each have developed ideologies that defend their own systems and paint the other as harmful or even evil.