In this economic system, people usually produce just what they need to survive.

A traditional economy is a system that relies on customs, history, and time-honored beliefs. 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 bartering instead of money. 

Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, and South 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 over time. 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 combines the characteristics of the other three.

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.

5 Characteristics of a Traditional Economy

The five characteristics of a traditional economy are:

1. Centering around a family or tribe
2. Existing in a hunter-gatherer and nomadic society
3. Producing only what it needs
4. Relying on a barter system
5. 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. 

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 when they distribute production to whoever contributed the most and earned it. That would be the case if the best hunter or the leader of the community received the best cut of meat or the best grains from a farmer. If an economy feeds children and the elderly first, it would be adopting communism and basing it on people's needs.

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.

Examples of a Traditional Economy

America had traditional economies before the immigration of Europeans. Nomadic Native American and indigenous economies had advantages, like communities of people with stronger immune systems. Small communities protected them from smallpox and other diseases from other countries and communities—but only for a while. Eventually, people from other countries immigrated and brought with them new diseases, as well as advanced weapons and more resources. Native Americans and indigenous communities could not fight off the diseases. These people who moved into their land also brought violent colonization and genocide to these communities.

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.

Haiti is another example. Haiti's economy is largely dependent on small family farms. It also uses wood fuel as a primary energy source. Unfortunately, many people live in poverty in Haiti and the nation's reliance on wood has also made it vulnerable to natural disasters, such as the earthquake that struck in 2010.

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 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.

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.

What system in economy provides just enough for people to live?

What type of economy is called where one is supposed to produce everything they need?

What is capitalism and socialism?

What is capitalism in economics?