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At first glance, the term "traditional economy" would appear to mean the market-focused U.S. economy Americans have experienced for hundreds of years.

Yet a deeper look reveals a significantly different meaning of a traditional economy, one that relies more on culture, customs and local history than dollars, cents, profits and losses.

While certain elements are similar in traditional and capitalist economies (production, labor and trade are common), the gulf widens when you start looking at real-world examples of traditional economies. An economy where cows can replace cash and where communities can literally be on the move looking for better economic conditions has an interesting story to tell.

What Is a Traditional Economy?

A traditional economy is one which doesn't operate under a profit motive.

Instead, it emphasizes the trading and bartering of products and services that enable participants to subsist in a specific region, community and/or culture. Largely, traditional economies are a way of life in underdeveloped countries that rely more on old-fashioned economic models like farming or hunting than on newer-age modes like industry and technology.

Traditional economies often develop over centuries, relying on the same time-proven economic drivers, like agriculture, fishing, hunting and trading that a community's ancestors used centuries ago. Economists use the term "completeness" to help define a traditional economy - one where all goods and services are consumed, and there is no excess or shortage of goods and services that drive a traditional economy.

Traditional Economy Compared With 3 Other Systems

To better define a traditional economy, it's helpful to compare and contrast it with other major, historical global economies:

1. Capitalist Economies

Historically, these societies leverage market forces, such as supply and demand, with a strong motivation to earn a profit, to shape their economic models.

2. Socialist Economies

While socialism has been stretched in different directions by political partisans in recent years, it's definition has remained stable over time. Basically, socialism is defined as an economic model where all citizens in a country, region or community each own the factors of production equally. Typically, equal economic outcomes are generated after the election of a democratically chosen government.

3. Communist Economies

Communism is an economic model where the collective, governed by a centralized government, owns any and all properties located in the collective. Communism is modeled upon a classless society, where the work of the citizenry - the fruits of their labor - are taken by the government and distributed throughout the populace based on need.

4. Traditional Economy

This economy relies on tradition and culture to choose what goods and services will be produced, how those goods and services will be produced, and how those goods and services will be distributed throughout the populace.

History of Traditional Economies With Examples

Historically, traditional economies date all the way back to Cro-Magnon man, in fact, to the beginning of humankind.

Back then, duties like hunting, farming and gathering, and the seeking of shelter, were split among the group as a proper way to build an economic model (i.e., managing the distribution of labor as a means of producing, distributing, and consuming goods and services for a community.)

A good example of an early origin of the traditional economy comes from the Maasai tribe of East Africa. There, tribal leaders designed an economic model where decisions on labor, production, and the distribution of products and goods were based on tradition and community custom.

Like most traditional economies dating back through time (and leading up to present traditional economies), the Maasai were indigenous people who lived basically the same lives, living off the land as cow, sheep and goat herders, generation after generation. In linking the Maasai to a traditional economy, there are three key points to make:

  • Generally, the Maasai created their wealth through the raising of (usually) cattle - that was their main currency.
  • In economic terms, Maasai wealth was measured by the number of children a family produced and by the number of cattle raised.
  • Work-wise, labor was distributed by the Maasai based largely on demographics - men built shelters that defended the community (including their animals) from wild predators, young men tended to the cattle, and women milked the cattle, raised the youngest children, and prepared meals.

That ageless culture largely holds true even today, as the Maasai continue to lead seminomadic lives, and continue to manage their lives via a traditional economy. Similar cultures, like the Inuit in Greenland and Alaska, and farming communities in Haiti and other island countries still largely practice a traditional economic model today.

Over time, though, traditional economies largely gave way to so-called command economies, where rulers (often unelected) in countries like Greece, Italy and Egypt, made the primary economic decisions and the people followed.

Market economies, the model for capitalism, didn't take hold until the 16th century, prospering in more developed nations like Germany and the U.K.

Characteristics of a Traditional Economy

A traditional economy based on customs, traditions, and beliefs has several defining characteristics:

  • A traditional economy is modeled on how a community actually lives, dependent on geography, culture, hierarchy, and tradition.
  • A traditional economy is modeled upon age-old means of production, such as agriculture, fishing, hunting, and gathering.
  • A traditional economy doesn't depend on a single currency. Instead, it relies on a system of barter and trade.
  • A traditional economy depends on the products and services produced to be fully used - nothing is wasted in a traditional economy.
  • A traditional economy may be one where a community or society actually moves geographically, such as the Maasai tribe following their cattle, or Cro-Magnon man following herds of animals to hunt.

Advantages of a Traditional Economy

  • Traditional economies breed strong, tight-knit communities where every member plays a role in either generating or supporting the production of goods and services.
  • Traditional economies also create an environment where each member of the community is aware of the stakes involved, and well aware of the role they play in contributing to a traditional economy. This knowledge and awareness, and the skills that are honed because of this outlook, is then passed on to younger generations.
  • Traditional economies produce no industrial pollution, and keep their living environment clean. Traditional economies only produce and take what they need, so there is no waste or inefficiencies involved in producing the goods required to survive as a community.

Disadvantages of a Traditional Economy 

  • Traditional economies have to continually work to produce those goods to survive. There are no weekends off or vacations. To sustain a traditional economy means working hard with long hours, with no guarantee that the caribou will be caught or that crops will survive extreme weather.
  • A traditional economy isn't as efficient as a market economy, which has a significantly stronger track record of success in guaranteeing a good quality of life for society members.
  • In a traditional economy, there are few career choices. Specific roles in a traditional economy are handed down from generation to generation. If your father was a hunter, you'll be a hunter, too. In a traditional economy, change is largely shunned, as change threatens a society's chances of survival.