The Distribution and The Production Process

An economy is a place of interaction, production, distribution and exchange, and the learning and sharing of various goods and services by various agents. In simple terms, it is defined as ‘a social domain that relate to the production, exchange, distribution and consumption of various goods and services by distinct agents’. Economists define an economy as a system that operates with limited external constraints such as demand, supply and interaction. This article focuses on economic theory and applies it to studying economies.

The study of economics involves the analysis of how people, firms or institutions to engage in the production, saving or distribution of wealth, how they determine prices and what drives them to engage in particular activities. Basically, in an economy, production determines prices and allocating resources between alternatives, determines the allocation of profits and the allocation of losses. It is also used to examine changes in economic conditions across time and to evaluate the performance of specific firms or institutions. It is considered a key theoretical framework that has been used since the advent of modern economy to explain complex economic phenomena.

A company is considered to be in a state of economy when its value is not affected by outside factors and when the value of its output as a function of its price with reference to other firms and commodities is constant or unchanged. In contrast, there are four states of economy – inclusive of dynamic, non-dynamic, stationary and perfect. Dynamic economies grow and deplete their resources; non-dynamic economies remain at a stable or falling rate of economic activity; while perfect economies maintain a standard level of economic activity as they are, in a sense, a defined state of the economy where there is no changeable factor. All the four states of the economy exhibit a characteristic of economic behavior that is characterized by changes in the supply of money and credit, interest rates and balance of payments over a short-to-medium span of time. The classical economists distinguished four types of economies namely industrial, retail trade, capital-intensive, and agricultural economies.

The classical view on what is the economy was also called a simple economy because it distinguished between what is produced and what is distributed. What is produced, were the goods that households consumed internally. This production included money, durable goods and all other goods that were necessary to the operation of households. On the other hand, what is distributed were the resources that households used to produce goods. This distribution included the value of money, durable goods, labor and other intermediate resources. It also took into account the difference between the value of what is produced and the value of what is consumed.

Households could survive without money, but they could not survive without durable goods like homes, clothing, farms etc. Households spent money on these goods to keep them in good condition for future use. A classical economy distinguished between what is produced and what is distributed. Simple economies depend on a principle of homo economicus i.e. individuals using their effort or goods to act as if they are engaged in a homo economicus activity which is how they make money.

In the classical and post-classical economic theory, entrepreneurs are the true creators of wealth rather than households, governments and corporations. Entrepreneurs produce scarce resources either through physical work, human capital or intellectual creation. They then either buy products in a free market or transfer the ownership of scarce resources to an organization that owns them. Examples include the resources that farmers use to grow crops, the buildings that people construct to live and work, the machines that laborers use and so on. Businesses buy products and sell them to consumers in the form of wages or salaries and create employment.

The classical and post-classical economic theory maintains that households create economic wealth by spending their leisure hours creating works for themselves and their loved ones and by sharing these works with fellow households and communities. A classical economy has little reliance on household management and there is little direct involvement of household management in the economy. Households create value in the form of what they consume, what they sell and how they spend their leisure time. They have no direct influence over economic output and so can take part only indirectly through what they do. They therefore cannot contribute directly to economic wealth and income since household management of production is excluded from the process of production and distribution in a classical economy.

Post-classical economies have begun to include household management in the process of distribution and production. Households can now become economic creators and not only consume the value created by producers and institutions but also transfer that value to other households, goods and services. Households can no longer be passive consumers but active producers of economic goods through what they consume and through what they sell. This has led to changes in the way markets are organized in classical and post-classical economies. Marketplaces no longer solely serve as warehouses for finished goods but have also evolved as the main repositories of information and knowledge and as the repositories of the means of livelihood for most of the population.