Traditional Economy: Characteristics, Pros, Cons and Examples explained by professional Forex trading experts the “ForexSQ” FX trading team.
Traditional Economy: Characteristics, Pros, Cons and Examples
Definition: A traditional economy is a system that relies on customs, history and time-honored beliefs. Tradition guides economic decisions such as production and distribution. Traditional economies depend on agriculture, fishing, hunting, gathering or some combination of the above. They use barter instead of money.
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 pockets of traditional economies scattered 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 either market, command or mixed economies 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 usually 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.
It says “to each according to his needs.”
There is little friction between members. That’s because custom and tradition dictate the distribution of resources. 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’s kept the 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 vulnerable 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 wage war. For example, Russian oil development in Siberia has damaged streams and the tundra. That’s reduced traditional fishing and reindeer herding for traditional economies in those areas. (Source: “7 Advantages and Disadvantages of a Traditional Economy,” NavajoCode.)
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 newcomers’ market economy gave them weapons and more resources. The traditional economies couldn’t compete. (Source: “Massive Population Drop Found for Native Americans,” National Geographic, December 5, 2011. “Health of American Indians in Decline Before Columbus,” Science.)
The United States had many aspects of a traditional economy before the Great Depression. At the beginning of the 20th century, 60 percent of Americans lived in farming communities. Agriculture employed at least 40 percent of the workforce. But they used poor farming techniques to meet high demand following World War I. That led to the Dust Bowl once droughts hit.
By 1930, only 21 percent of the workforce was in agriculture. It generated just 7.7 percent 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. (Source: U.S. Dept. of Agriculture, The 20th Century Transformation of Agriculture.)
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. (Source: “Haiti’s Economy,” CIA World Factbook. “Why Is Haiti so Poor?” Marginal Revolution.)
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 Saami people of Scandinavia manage reindeer herds. A tribe member’s relationship to managing the herd defines his or her economic role. That includes his or her legal status, culture and state policies toward the individual. (Source: Lee Huskey, “The Changing Economies of Indigenous Communities,” Module Six, University of Alaska at Anchorage.)
Traditional Economy: Characteristics, Pros, Cons and Examples Conclusion
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