What Is a Traditional Economy? Definition and Examples

A traditional economy is a system in which the development and distribution of goods and services are determined by customs, traditions, and time-honored beliefs.

Traditional Economy Definition

In traditional economies, fundamental economic decisions, such as the production and distribution of goods and services, are determined by tradition and societal needs rather than by their potential for monetary profit. People in societies with traditional economies typically trade or barter instead of using money, and depend on agriculture, hunting, fishing, or a combination of the three for their livelihoods.

In most modern free market-based economies, such as that of the United States, the production of goods is based on demand and how much money people are willing to pay. The society’s economic health is usually measured in terms of gross domestic product (GDP)—the market value of all consumer goods and services produced in a given period. This contrasts with traditional economies, in which the behavior of people in the market is determined by family and personal relationships rather than by their monetary wealth and impulses to buy the things that they want.

In a traditional economy, for example, children who are raised on farms are likely to be farmers as adults. Rather than using money, they will exchange the goods they produce, like milk or leather, for goods they need, like eggs and vegetables for food. Based on traditional family and community ties, they tend to barter with the same people their parents and grandparents had traded with.

Traits of Traditional Economies

Traditional economies are typically found in rural areas of developing second and third-world nations, often in Africa, Latin America, Asia, and the Middle East.

Traditional economies center around a family or tribe. As in the routines of daily life, economic decisions are based on traditions gained through the experiences of the elders.

Many traditional economies exist as nomadic, hunter-gatherer societies that migrate seasonally across vast areas following the herd animals they depend on for survival. Often having to compete with similar groups for scant natural resources, they trade with them rarely since they all need and produce the same things. 

When traditional economies do engage in trade, they rely on barter rather than currency. Trade only takes place between groups that do not compete. For example, a hunting tribe might trade some of its meat for vegetables grown by a farming tribe. 

The term “completeness” is used by economists to describe a traditional economy as one in which all goods and services are consumed. Producing only what they need to survive, traditional economies rarely produce a surplus of goods, thus further eliminating the need to trade or create money.

Finally, traditional economies begin to evolve beyond the hunter-gatherer stage when they settle in one location and take up agriculture. Farming allows them to develop a surplus of crops they can use for trade. This often encourages groups to create a form of money to facilitate trade over long distances.

In defining a traditional economy, it is helpful to compare it to more-common major global economies such as capitalism, socialism, and communism.

Capitalism

Capitalism is a form of a free-market economy in which the production and distribution of goods and services are determined by the laws of supply and demand. Based on a strong motivation to earn a profit, the means of production are owned by private companies or individuals. The success of capitalist economies depends on a strong sense of entrepreneurship and an abundance of capital, natural resources, and labor—factors rarely found in traditional economies.

Socialism

Socialism is an economic system in which all members of the society own the means of production— labor, capital goods, and natural resources—equally. Typically, that ownership is granted and controlled by either a democratically elected government or a citizen cooperative or public corporation in which everyone owns shares. The government strives to ensure that the benefits of the economy are distributed equally to prevent income inequality. Thus, socialism is based on the economic philosophy of “to each according to his contribution.”

Communism

Communism is a type of economy in which the government owns the means of production. Communism is known as a “command” economy because while the government does not legally own the workforce, government-chosen central economic planners tell the people where to work. As developed by German philosopher Karl Marx, the communist economy is based on the philosophy of “from each according to his ability, to each according to his needs.”

Depending on how they operate, traditional economies can have characteristics of capitalism, socialism, and communism.

An agricultural economy that allows individuals to own their farms employs an element of capitalism. A nomadic tribe of hunters that allows its most productive hunters to keep the most meat is practicing socialism. A similar group that gives meat to children and the elderly first is practicing communism. 

Traditional Economy Examples

Identifying modern traditional economies can be difficult. Many countries classified as communist, capitalist, or socialist based on their economic systems have isolated pockets inside them that function as traditional economies.

Brazil, for example, is a country whose main economy is a mixture of communist and capitalist. However, its Amazon River rainforest is dotted by pockets of indigenous people who have traditional economies based on the goods they produce, mainly by hunting and farming, used to barter with their neighbors.    

Haiti, the poorest country in the Western Hemisphere, is another example. While officially considered to have a free market economy, 70% of the Haitian population relies on subsistence farming for their livelihood. Their reliance on wood for fuel has stripped the forests, leaving more than 96% of the population vulnerable to natural disasters, mainly hurricanes, floods, and earthquakes. Haiti's traditional practice of voodoo is often cited as another reason for its poverty. Rather than sound agricultural practices, farmers depend on local shamans and traditional deities to improve their economic situations.

In the Arctic regions of Alaska, Canada, and Greenland, indigenous peoples like the Inuit still employ a traditional economy based on hunting and fishing, gathering, and native crafts as the means of production. While they occasionally sell hand-made items to outsiders, most of what they produce is used to meet the needs of their families and to barter with their neighbors.

Ranging across parts of Norway, Sweden, Finland, the nomadic Sami people maintain a traditional economy based on reindeer herding providing them with meat, fur, and transportation. The individual tribe members’ duties in managing the herd determine their status in the economy, including how they are treated by the government. Many indigenous groups in Africa, Asia, and the Pacific islands have similar traditional economies.

Pros and Cons of Traditional Economies

No economic system is perfect Similar to capitalism, socialism, and communism, traditional economies come with advantages and potentially crippling disadvantages.

Advantages

Because of their primitive nature, traditional economies are easily sustainable. Due to their relatively small output of goods, they suffer from far less waste compared to the other three systems.

Because they are so dependent on human relationships, people clearly understand the significance of what they are contributing to the society’s well-being. Everyone feels their efforts are worthwhile and appreciated by the group as a whole. This outlook helps ensure that their knowledge and skills will be passed on to future generations.

Producing no industrial pollution, traditional economies are very environmentally friendly. Since they produce no more than they consume, there is no waste involved in producing the goods needed to sustain the community.

Disadvantages

There are no days off in a traditional economy. Producing the goods needed for the community to simply survive requires constant work. In killing a caribou, catching a salmon, or raising a crop of corn, success is never guaranteed.

Compared market economies like capitalism, a traditional economy is far less efficient and less likely to succeed in providing a consistently good quality of life for its people.

With specific work roles handed down from generation to generation, there are few career choices in traditional economies. A hunter’s son will be also a hunter. As a result, change and innovation are shunned as a threat to the survival of the society.

Perhaps the most potentially damaging disadvantage of traditional economies is that they are often totally dependent on the forces of nature. One crop ruined by draught, or a rain forest leveled by a natural disaster, such as a hurricane, can result in starvation without outside assistance. Once such humanitarian assistance comes, either from a government or non-profit agency, the traditional economy can be forced to transform itself into a profit-driven market economy.

Sources

• “An Overview of Economic Systems.” BCcampus Open Publishing, https://opentextbc.ca/principlesofeconomics/chapter/1-4-how-economies-can-be-organized-an-overview-of-economic-systems/#CNX_Econ_C01_006.
• Mamedov, Oktay. “Traditional Economies: Innovations, Efficiency and Globalization.” Economics and Sociology, Vol. 9, No 2, 2016, https://www.economics-sociology.eu/files/ES_9_2_Mamedov_%20Movchan_%20Ishchenko-Padukova_Grabowska.pdf.
• U.S. Central Intelligence Agency. “Haiti.” The World Factbook, https://www.cia.gov/the-world-factbook/countries/haiti/
• U.S. Central Intelligence Agency. “Brazil.” The World Factbook, https://www.cia.gov/the-world-factbook/countries/brazil/.
• “Sami economy, livelihoods and well-being.” OECDiLibrary, https://www.oecd-ilibrary.org/sites/9789264310544-5-en/index.html?itemId=/content/component/9789264310544-5-en#.
• Pass, Andrew. “Traditional Economies and the Inuit.” Econedlink, July 12, 2016, https://www.econedlink.org/resources/traditional-economies-and-the-inuit/.