Intro to Econ: Traditional Economic System
Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve maximum output.
Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the aggregate economy, and microeconomics, which focuses on individual consumers and businesses.
One of the earliest recorded economic thinkers was the 8th-century B.C. Greek farmer/poet Hesiod, who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity. But the founding of modern Western economics occurred much later, generally credited to the publication of Scottish philosopher Adam Smith’s 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations.
The principle (and problem) of economics is that human beings have unlimited wants and occupy a world of limited means. For this reason, the concepts of efficiency and productivity are held paramount by economists. Increased productivity and a more efficient use of resources, they argue, could lead to a higher standard of living.
Despite this view, economics has been pejoratively known as the “dismal science,” a term coined by Scottish historian Thomas Carlyle in 1849. He used it to criticize the liberal views on race and social equality of contemporary economists like John Stuart Mill, though some sources suggest Carlyle was actually describing the gloomy predictions by Thomas Robert Malthus that population growth would always outstrip the food supply.
Traditional Economic System
An economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. Economic systems regulate factors of production, including capital, labor, physical resources, and entrepreneurs. An economic system encompasses many institutions, agencies, and other entities.
The traditional economic system is based on goods, services, and work, all of which follow certain established trends. It relies a lot on people, and there is very little division of labor or specialization. In essence, the traditional economy is very basic and the most ancient of the four types.
Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, Latin America, and the Middle East. You can also find pockets of traditional economies scattered even in developing countries throughout the world.
There are usually very few resources to share in communities with traditional economic systems. Either few resources occur naturally in the region or access to them is restricted in some way. Thus, the traditional system, unlike the other three, lacks the potential to generate a surplus. Nevertheless, precisely because of its primitive nature, the traditional economic system is highly sustainable. In addition, due to its small output, there is very little wastage compared to the other three systems.
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
Characteristics of a Traditional Economic System
- 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.
- 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.
- Most traditional economies produce only what they need. There is rarely surplus or leftovers. That makes it unnecessary to trade or create money.
- When traditional economies do trade, they rely on barter. It can only occur between groups that don’t compete.3 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.
- Traditional economies start to evolve once they start farming and settle down.4 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.
- 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.
- 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.
- 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 exposed 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 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
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.
- 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.
- 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.
- 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.
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. That’s called “each according to his need.”
- 5 traits of a traditional economy. (n.d.). The Balance. https://www.thebalance.com/traditional-economy-definition-examples-pros-cons-3305587
- Corporate Finance Institute. (2019, December 14). Economic system – Overview, types, and examples. https://corporatefinanceinstitute.com/resources/knowledge/economics/economic-system/
- O’Connell, B. (2018, October 29). Traditional economy: Definition, characteristics and examples. TheStreet. https://www.thestreet.com/markets/what-is-traditional-economy-14759652