Time-honoured beliefs, history, and customs are a few things that decide the production and distribution of goods and services in a traditional economy. The residents of a society or tribes are the sole decision-maker in a traditional economy. Countries that follow a traditional economy usually rely on various activities, such as hunting, fishing, pottery, agriculture and other industries, to boost their financial condition. This economy is followed on various continents, such as Asia, South America, and Africa.
People or societies who practise a traditional economy use a barter system as a means of transaction. Instead of being driven by profits, a traditional economy entirely depends on the people’s traditions, habits, and rituals to determine what should be produced, how it should be produced, and to whom the products should be distributed. In this type of economy, there is no surplus production. Depending on the people’s needs, only the required amount of supplies is produced.
Understanding How a Traditional Economy Works
According to anthropologists and economists, almost all countries first had a traditional economy before adapting to other economies later. There are three crucial assumptions based on which a traditional economy works:
- People will make decisions according to their self-interests. Traditions and cultural values will guide decisions related to producing and distributing goods.
- Only rational people are responsible for deciding how the economy would operate.
- People are free to change their decisions. They may react to certain beliefs or incidents and make new changes that would benefit the overall well-being of the country’s citizens.
The economy is based on the fact that people live in an ideal world and would make the decisions that would ensure the peaceful living of everyone else.
Main Characteristics of a Traditional Economy
One of the most crucial points that you need to remember about a traditional economy is that it consists of rational people. These people remain entirely unaffected by any emotion or external factors that may work against the country’s economy. They make decisions with a free mind and only think about the welfare of the country’s citizens. Some of the characteristics of a traditional economy are as follows:
- A traditional economy is practised in a nomadic society consisting of people who are hunters and gatherers.
- This economy is purely based on a few activities, such as fishing, gathering, hunting, and agriculture.
- The regular economic decisions in the society are taken based on traditions, cultural beliefs and experiences imparted by the elders.
- Trading and bartering are two primary modes of payment in a traditional economy. Instead of using any currency as a mode of transaction, people depend on bartering or exchanging goods between themselves.
- This isn’t like a free market where companies can profit by selling products and services. Instead, people consider their own benefits while trading or bartering anything. There is no use for money in this economy.
- Unlike other economies, there is next to no surplus produced in a traditional economy. This means the goods produced by people are consumed or used fully.
- Hunting is a primary part of a traditional economy. Societies spend hours following animals so that they can hunt them and later trade them for goods or services that they want. Hunting is a source of living in a traditional economy for many families.
- Everyone living under a traditional economy knows their role. That is why there is less friction among the people. For example, if someone is responsible for agriculture, that person wouldn’t want to get involved in hunting. Instead, they would trade or barter the things they want from the person responsible for producing the other type of goods.
Benefits of a Traditional Economy
Although there is no money involved in the traditional economy, it certainly has some benefits. Here are a few reasons why many people prefer a traditional economy:
This type of economy doesn’t go into the complications of making profits and being a part of a competitive market where every company wants to be the best in the business. As already mentioned, different people have different roles in the economy. If they fulfil their respective roles, the economy continues to thrive.
This is basically a tribe-based or family-based economy in which the resource distribution is regulated through traditions. Each member of the family contributes to producing supplies required for their family. Since it doesn’t involve monetary transactions, it doesn’t need people to start businesses. If someone has an acre of land, they can start growing crops. They can then trade their crops to get clothes, spices, or anything they or their family needs.
Another crucial aspect of a traditional economy is that it only focuses on producing things available within its geographic location. There is no import or export of products. This helps to lead a self-sustainable economy. It doesn’t require the help of anyone.
A traditional economy exists within communities that believe that they live in an ideal world. They rely on decision-making by the local leaders. The people within the community ensure that their decisions are in the best interests of themselves and their families. This economy doesn’t involve spending money or making profits. Instead, they believe in exchanging goods between the community members.
This economy is ideal for societies with scarce populations, as those don’t require centralised economic planning. Such communities produce a very limited quantity of goods depending on the basic requirements of the community members, and no excess needs to be regulated or managed.