Traditional Economy With Its Characteristics, Pros, Cons, and Examples
The Five Traits of a Traditional Economy
Economic theory is an esoteric concept that may be tricky to understand in concrete terms. Of the four types of economic systems, a traditional economy relies on customs, history, and time-honored beliefs. The other systems are market, command, and mixed.
In the first economic system, tradition guides economic decisions such as production and distribution. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They use barter instead of money.
A market economy is a system where the laws of supply and demand direct the production of goods and services. A command economy is where a central government makes all economic decisions. Either the government or a collective owns the land and the means of production. A mixed economy, meanwhile, is a system that combines characteristics of the other three.
Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, Latin America, and the Middle East. But you can find traditional economies scattered in developing countries throughout the world. Economists and anthropologists believe all other economies got their start as traditional economies—meaning these pockets, too, will evolve over time.
Five Characteristics of a Traditional Economy
First, traditional economies center around a family or tribe. They use traditions gained from the elders' experiences to guide day-to-day life and economic decisions.
Second, a traditional economy exists in a hunter-gatherer and nomadic society. These societies cover vast areas to find enough food to support them. They follow the herds of animals that sustain them, migrating with the seasons. These nomadic hunter-gatherers compete with other groups for scarce natural resources. There is little need for trade since they all consume and produce the same things.
Third, most traditional economies produce only what they need. There is rarely surplus or leftovers. That makes it unnecessary to trade or create money.
Fourth, when traditional economies do trade, they rely on barter. It can only occur between groups that don't compete. For example, a tribe that relies on hunting exchanges food with a group that relies on fishing. Because they just trade meat for fish, there is no need for cumbersome currency.
Fifth, traditional economies start to evolve once they start farming and settle down. They are more likely to have a surplus, such as a bumper crop, that they use for trade. When that happens, the groups create some form of money. That facilitates trading over long distances.
Traditional Mixed Economies
When traditional economies interact with market or command economies, things change. Cash takes on a more important role. It enables those in the traditional economy to buy better equipment. That makes their farming, hunting, or fishing more profitable. When that happens, they become a traditional mixed economy.
Traditional economies can have elements of capitalism, socialism, and communism. It depends on how they are set up. Agricultural societies that allow private ownership of farmland incorporate capitalism. Nomadic communities practice socialism if they distribute production to whoever best earned it. In socialism, that's called "to each according to his contribution."
That would be the case if the best hunter, or the chief, received the choicest cut of meat or the best grains. If they feed children and the elderly first, they're adopting communism. That's called "each according to his need."
There are several pros and cons of a traditional economy, as discussed below.
Little or no friction between members.
Everyone understands their role and contribution.
More sustainable than a technology-based economy.
Exposed to changes in nature and weather patterns.
Vulnerable to market or command economies that use up their natural resources.
Custom and tradition dictate the distribution of resources. As a result, there is little friction between members. Everyone knows their contribution toward production, whether it's as a farmer, hunter, or weaver.
Members also understand what they are likely to receive. Even if they aren't satisfied, they don't rebel. They understand that it's what has kept society together and functioning for generations.
Since traditional economies are small, they aren't as destructive to the environment as developed economies. They don't have the capability to produce much beyond their needs. That makes them more sustainable than a technology-based economy.
Traditional economies are exposed to changes in nature, especially the weather. For this reason, traditional economies limit population growth. When the harvest or hunting is poor, people starve.
They are also vulnerable to market or command economies. Those societies often consume the natural resources traditional economies depend on or they wage war. For example, Russian oil development in Siberia has damaged streams and the tundra. That has reduced traditional fishing and reindeer herding for traditional economies in those areas.
America had traditional economies before the immigration of Europeans beginning in 1492. Nomadic Native American economies had advantages, like stronger immune systems. Their small communities protected them from smallpox and other imported diseases for a while. But poaching, war, and genocide destroyed them over time. The market economy gave newcomers advanced weapons and more resources. The traditional economies couldn't compete.
The United States had many aspects of a traditional economy before the Great Depression. At the beginning of the 20th century, more than half of Americans lived in farming communities. Agriculture employed at least 40% of the workforce. But they used poor farming techniques to meet high demand following World War I. That led to the Dust Bowl once 10 years of droughts hit.
By 1930, only 21% of the workforce was in agriculture. It generated just 7.7% of the gross domestic product.
Before the Civil War, the American South was almost entirely a traditional economy. It relied on farming. It used a strong network of traditions and culture to guide it. These were devastated by the war.
Two-thirds of Haiti's population relies on subsistence farming for their livelihood. Their reliance on wood as a primary source of fuel has stripped the forests of trees. That makes them vulnerable to natural disasters, such as the earthquake that struck Haiti in 2010. Some economists also point to Haiti's tradition of voodoo as another reason for its poverty.
Indigenous tribes in the Arctic, North America, and eastern Russia have traditional economies. They rely on fishing and hunting of caribou for their existence. For example, the Sami people of Scandinavia manage reindeer herds. A tribe member's relationship to managing the herd defines their economic role. That includes their legal status, culture, and state policies toward the individual.
The Bottom Line
Most economic structures today are sophisticated descendants of the traditional economy. This economic structure is governed by culture and characterized by heavy reliance on farming, hunting, and fishing. Today, traditional economies still exist in some developing countries and among indigenous tribes. Several traditional economies have evolved into a mixed type that incorporates elements from capitalism, socialism, or communism.
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National Geographic. “Massive Population Drop Found for Native Americans, DNA Shows.” Accessed Jan. 12, 2020.
United States Department of Agriculture. “The 20th Century Transformation of U.S. Agriculture and Farm Policy.” Accessed Jan. 12, 2020.
Central Intelligence Agency. “Haiti. The World Factbook.” Accessed Jan. 12, 2020.
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UAA Institute of Social and Economic Research. “The Changing Economic Status of Alaska Natives, 1970-2007.” Accessed Jan. 12, 2020.