Given the code you described, this error can come up for three reasons:
python isn't on your PATH, or
secondary.py isn't in your current working directory.
Argument isn't in your current working directory.
From your edited question, it sounds like it's the last of the three, meaning the problem likely has nothing to do with system at all… but let's see how to solve all three anyway.
First, you want a path to the same python that's running primary.py, which is what sys.executable is for.
And then you want a path to secondary.py. Unfortunately, for this one, there is no way (in Python 2.3) that's guaranteed to work… but on many POSIX systems, in many situations, sys.argv\[0\] will be an absolute path to primary.py, so you can just use dirname and join out of os.path to convert that into an absolute path to secondary.py.
And then, assuming Argument is in the script directory, do the same thing for that:
my_dir = os.path.dirname(sys.argv[0])
os.system('%s %s %s' % (sys.executable,
os.path.join(my_dir, 'secondary.py'),
os.path.join(my_dir, 'Argument')))