Economy as an Institution

Did you know that the word 'economy' is derived from the ancient Greek oeconomicus, referring to the practical activity of household management? It's strange to think, then, how much household work has become detached from the wider economy.

This all has to do with the development of the economy itself, as well as the roles that it has come to play in society.

• In this explanation, we will introduce the economy as a social institution.
• We'll be taking a look at the various types of economic institutions, including agricultural, industrial, and postindustrial economic systems.
• Next, we'll explore the function of the economy as a social institution, followed by the question of the importance of the economy as a social institution.
• After this, we'll look at the economy as an institution in sociology, referencing various theoretical perspectives.

The Economy as a Social Institution

The economy is one of the earliest societal structures. Just like other social institutions (such as family, religion, and the government), the economy simultaneously shapes the social order and is also shaped by the social order.

So, what do we mean by 'the economy'?

Fig. 1 - Sociologists explore the economy in terms of its historical progression and functions.

Types of Economic Systems

The two dominant economic systems in Western society are capitalism and socialism. There have been many developments and variations of these systems, which persist from place to place and time to time. Let's take a brief look at capitalism and socialism now.

Economies of Agricultural Societies

The earliest humans lived as hunter-gatherers, finding subsistence in animals, vegetables, and wild fruits. Seeing as these resources were scarce, people often had to pick up and leave for other locations to find a higher abundance of them. Some sociologists suggest that this can't be classified as an economy, because there was no trading involved.

The raising of crops and domesticating of animals marked the rise of the earliest economies. This is known as the Agricultural Revolution, which developed at different times and speeds in different parts of the world. The technology that set the agricultural revolution in full motion was the plow, allowing people to settle in places for longer and creating jobs for them to do (such as storing excess crops and building irrigation systems).

Notwithstanding the creation of towns, cities, and public administration in urban areas, a key invention of this area was money, once it was realized that trading had its limitations (because one person did not always have what another person needed and could exchange their produce for).

In the earliest economies, 'money' was used in the form of many objects like rice or barley. The underlying premise was that a particular value could be assigned to these objects, establishing a rate of exchange and ways of dividing property.

The system of mercantilism was developed by the government to protect their share of markets through the run of colonialism. Mercantilistic governments controlled colonial and foreign markets using taxes, high tariffs, and bans on certain goods. This inevitably led to a surge in manufacturing, ultimately bringing about the Industrial Revolution.

Economies of Industrial Societies

In preindustrial societies, the land was the primary source of capital and, therefore, the source of almost all wealth. This changed with the rise of the Industrial Revolution, through which owners of large sums of money replaced landowners as the most powerful economic group.

The turn of the 18th century saw a shift away from manual labor, towards the use of machines for manufacturing goods. This dramatically sped up production time, and also increased efficiency through the establishment of the assembly line in factories. Agricultural practices were also enhanced so that people could plant large fields of crops that could be easily stored and distributed.

While the Industrial Revolution is credited with modernizing the world, it also produced countless socioeconomic issues that still linger today. For example, per-capita income grew even more rapidly than the world's population between 1800 and 2000.

However, inequalities grew as well - the owners of the means of production hoarded endless fortunes while the vast majority only had their cheap labor to offer in return.

Postindustrial Societies and the Information Age

After the modernizing impacts of the Industrial Revolution, we now live in what is known as postindustrial societies, where information is the most valuable commodity. The most powerful group in this society consists of those with the power to produce, store and spread information.

Scholars understand societal developments in economic terms by distinguishing between four sectors:

1. The primary sector extracts and produces raw materials.
2. The secondary sector turns materials into goods.
3. The tertiary sector provides services (such as healthcare).
4. The quaternary sector produces ideas that lead to new technologies and developments.

In underdeveloped countries, most people work in the primary sector. The more an economy develops, the more people move out of the primary sector and into the secondary and tertiary sectors. For example, in highly-developed economies such as the U.S. and Western Europe, most of the workforce is a part of the service industry (i.e., the tertiary sector).

The Function of the Economy as a Social Institution

Just like any other social institution, the economy has an important role to play in the overall functioning of society. First and foremost, the economy oversees the organization of goods and services in terms of their production, distribution, and consumption.

In line with these core functions, the economy also creates jobs for people to do. Different sociologists perceive the importance of jobs in different ways. While Marxists argue that the purpose of the creation of jobs is to create and maintain the division of labor and class inequality in society, functionalists suggest that jobs carry out the important function of role allocation to create social order.

Importance of the Economy as a Social Institution

As we have seen, different theorists attribute different levels and reasons of importance to the economy as a social institution. However, a key core theory to be aware of when discussing this issue is the convergence theory.

Convergence Theory of the Economy

According to convergence theory, the more a country's economy grows, the more that country resembles an industrialized society.

In such industrialized economies, people tend to shift jobs relatively often, meaning that the workforce needs to be constantly trained and retrained. Another key factor is that cities become the centers of economic activity, and so a large portion of the population moves from rural to urban areas.

For even faster growth, economies require cheap capital to make new investments, access international markets, and increase productivity. This means that many countries choose to converge to strengthen their economies.

Types of Economic Institutions

Examples of economic institutions are:

• government organizations,

• banks, and

• investment funds.

The Economy as an Institution in Sociology

Let's now explore a few sociological perspectives on the economy.

Functionalist Perspective on the Economy

As a theory, functionalism is based on the premise that all institutions and structures work together to create a society resembling an efficient, smooth, and well-oiled machine.

The economy is one of those structures that ensures a well-functioning society through the efficient distribution of vital goods and services.

This system works well until it is interrupted by a disruptive event, such as the Great Recession. Markets can also become over-saturated, resulting in excessive supply (relative to demand), and eventually leading to inflation.

Functionalists suggest that such cyclical events are inevitable and that there is nothing we can do to stop them. However, the government often takes measures to encourage more lending and spending in order to avoid the consequences of the natural cycle.

Conflict Perspective on the Economy

For conflict theorists, the economy reproduces inequality in the capitalist system, rather than being a source of stability.

Marxists theorize these inequalities in terms of the class struggle, arguing that the bourgeoisie accumulates all of society's wealth by exploiting the oppressed proletariat.

Symbolic Interactionist Perspective on the Economy

Symbolic interactionists make sense of society by studying how people engage in meaning-making in their everyday lives.

An important concept in the symbolic interactionist theory of the economy is career inheritance. This concept suggests that children tend to enter either similar or the same occupations as their parents when they grow up. At their jobs, people also engage in what is known as career socialization, whereby they learn the norms and values of their workplace and/or industry.

Symbolic interactionist thinkers suggest that people are happier at their jobs when they feel that they have (at least some) control over their work, as well as when there is less risk involved in their jobs.

Globalization and the Economy

Fig. 2 - Globalization both affects and is affected by national economies.

In the context of the economy, globalization involves processes of integrating financial markets into a single market connected primarily through electronic networks of communication. There have been several globalizing initiatives implemented as a means to improve the economy.

Globalization poses both benefits and limitations when it comes to the economy. For example, there is increased potential for growing wealth, awareness, and development. On the other hand, the lack of regulations at the international level means that inequalities and economic damage are also much more likely to occur.

Work in the United States

The nature and value orientation of work in the United States has, historically, been based on the American Dream which, in turn, is premised on the notion of hard work as the only path to success. However, there is a lot of evidence that shows that there are many additional, structural factors at play when it comes to individual success.

Some aspects of the United States workforce are shaped by - and shape - the economy in particularly influential ways:

• The polarization of the workforce means that work often gets outsourced to developing countries. Furthermore, the automation of the workplace means that workers often get displaced from employment as work gets delegated to new technologies.

• There is also an increasing number of women in the workforce. Despite this upward trend, women are still underpaid, even when working the same roles as men.

• The United States has been framed as a 'land of opportunity' for many years. Workers of all skill levels have migrated to the U.S. to find work and prospects of a better life. While this may have been the case for some time, it all changed during the 2008 economic crisis, of which migrants became one of the most severely impacted groups. This is an example of how immigration may be related to the economy (and vice versa).

• High living standards and low wages mean that there is some level of poverty in the United States. There are other reasons for the existence of poverty as well, such as structural unemployment (when the number of people looking for jobs and the number of jobs available do not match).

Issues Facing the United States Economy

Following our overall understanding of the economy, we are now well-equipped to make sense of the issues that are facing the United States economy, and how we might tackle them.

Recessions in the U.S. Economy

Scholars cite the Great Recession as the largest global economic downturn since the Great Depression of the late 1920s.

Several factors led to the Great Recession of 2008, a primary cause being the provision of adjustable-rate introductory mortgages by banks to people with poor credit scores. However, after the introductory rate expired, these same people faced unexpectedly high interest rates on their loans. Unable to repay their loans, many people 'defaulted', putting a strain on the lending bodies and, ultimately, national and international economies.

The United States continues to deal with the repercussions of this event. While there are several signs of recovery (such as lowering unemployment rates), the nation's wealth is still very unevenly distributed. This is demonstrated by a sharp increase in CEO salaries, as well as the decline of wealth within the middle class.

The Wage Gap

Designed to even the wage distribution between men and women, the Equal Pay Act was passed in 1963. The premise of the Equal Pay Act was to ensure that men and women doing similar work would get equally paid.

However, about 50 years on, women continue to make less than men, even when they are doing the same job. According to the Pew Research Center, the gender pay gap has remained stable over the past 15 years, with women earning around 84 cents for every dollar that a man earns (Barroso & Brown, 2021).

It is important to consider - particularly from a sociological perspective - that the gap only widens when accounting for additional factors, such as ethnicity. To this end, women of color are significantly disadvantaged as compared to White women, men of color, and White men.

The Growth of International Markets

The growth of global capitalism poses significant challenges for manufacturers and workers in the United States. While manufacturers bear the weight of the decisions that influence the entire market, it is the workers who bear the brunt of insecure jobs, low pay, postponed retirement, and harmful working conditions. These conditions have only been worsened with the expansion of the global market.

As tends to be the case, the richest of society experience low to zero risk when it comes to the growth of international markets. The observation that the rich get richer and the poor stay poor has been supported by scholars as being an accurate one.