Key Takeaways
- Traditional economies base economic decisions on cultural values and beliefs.
- This economy relies on farming, hunting, and fishing.
- Several traditional economies have evolved into mixed economies that incorporate elements from capitalism, socialism, or communism.
- Traditional economies can be negatively affected by other economies that use large amounts of natural resources.
How a Traditional Economy Works
A traditional economy is an economy that relies on cultural customs, beliefs, and other traditions for economic decisions. The five characteristics of a traditional economy are:
- Centering around a family or tribe
- Existing in a hunter-gatherer and nomadic society
- Producing only what it needs
- Relying on a barter system
- Evolving once it starts farming and settling
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 bartering. 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.
Lastly, 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.
Note
Most traditional economies operate in emerging markets and developing countries. They are often found in Africa, Asia, and Latin America. You can also find pockets of traditional economies scattered in developing countries throughout the world.
Economists and anthropologists believe all other economies got their start as traditional economies. Thus, they expect remaining traditional economies to evolve into market, command, or mixed economies.
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.
Examples of a Mixed Economy
Before the Civil War, the southern states in the U.S. had somewhat of a traditional economy. These states and their economies relied heavily on farming—much of which was done by enslaved people. When the war was over and slavery was abolished, these farms were forced to operate in new ways.
Another example is before the Great Depression when the United States had many aspects of a traditional economy. At the beginning of the 20th century, more than half of Americans lived in farming communities. Agriculture employed at least 41% of the workforce. But they used poor farming techniques to meet high demand following World War I. That resulted in droughts that ultimately led to the Dust Bowl. By 1930, only 21.5% of the workforce was in agriculture. It generated just 7.7% of the gross domestic product.
Indigenous tribes in the Arctic, North America, and eastern Russia also have a history of traditional economies. These communities rely on fishing and hunting. For example, the Sami people of Scandinavia operated under a traditional economy that relied on bartering, fishing, and hunting.
Pros and Cons of a Traditional Economy
Pros
Little or no friction between members
Everyone understands their role and contribution
More sustainable than a technology-based economy
Cons
Exposed to changes in nature and weather patterns
Vulnerable to market or command economies that use up their natural resources
Pros Explained
- Little or no friction between members: 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.
- Everyone understands their role and contribution: 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.
- More sustainable than a technology-based economy: 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.
Cons Explained
- Exposed to changes in nature and weather patterns: 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 may starve.
- Vulnerable to market or command economies that use up their natural resources: 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.
Frequently Asked Questions (FAQs)
Which countries have a traditional economy?
Traditional economies are more likely to exist within countries rather than making up the national economy. For example, within the U.S., some Alaskan Inuit communities live in relative isolation and continue to use traditional economies. Some could argue that rural nations have some traits of traditional economies, but there are likely some traits from other types of economies, as well.
How are economic decisions made in a traditional economy?
Economic decisions are made by individuals or local leaders in a traditional economy. Since traditional economies rarely produce excess goods, and because they are generally less-populated societies, there isn't as much of a need for centralized planning. Local leaders may guide community decision-making, but not to the degree of a developed nation's central bank.
