A traditional economy is built on the time-honored customs, tradition and history. Traditions and history bind people together and produce a sense of community. A traditional economy is essentially an economic structure where beliefs, customs and traditions help shape the products and services that the economy creates, as well as the manner and rules of the distribution. The traditional economy may be a family enterprise or a public sector organization such as the government or a non-profit organization.
Traditional economies typically have a surplus or overproduction of some good or service. They are self-sustaining, since the sale or purchase of these goods and services creates a surplus or profit. This profit is the difference between what is spent and what is made available. The concept of the traditional economy assumes that money will be saved either by individuals or by businesses. These institutions depend on their surplus to finance growth, inflation, and unemployment protection.
The traditional economic system depends on scale economies to distribute inputs and produce surplus or income. scale economies depend on specialization for different types of goods produced. It is dependent on technology for most goods produced and the division of labor relies on technology. These differences among scale economies result in price differentials across the market and lead to an increasing dependence on specialization for certain goods. These differences also cause price differentials not only in the domestic market but in international markets as well.
Each traditional economy has its own political system and social organization. Each has a set of rules for how a property is acquired, who owns it, when it is owned, who becomes its legal owner, etc. Because of the political and social organization of traditional economies, each sets its own rules and regulations governing behavior. In the United States, this distinction among economies has resulted in an incredible freedom within the business environment. The entrepreneurial spirit was developed because of this difference among traditional economies. In other words, entrepreneurialism is not a product of the traditional economy.
Traditional economies rely on tradition, while entrepreneurialism relies on modernity. A traditional economy that depends on tradition finds that, over time, the knowledge of generations is lost or has been lost through forgetting or ignorance. This results in profound poverty and the dependence on what is known as “dead white men” to navigate the system. A traditional economy that relies on modernity finds that, over time, the knowledge of previous generations is forgotten or lost through scientific invention.
In traditional economies, people and governments were localized and self-sufficient; they did not need outside assistance in order to survive. The knowledge of previous generations allowed them to develop technology, to build social capital, to regulate interaction within their communities, and to rise above their particular economic systems to become globally competitive. In contrast, modern societies are characterized by the existence of national authorities and localized industries with no global significance. These industries are dependent on international trade and have developed different ways of structuring the economy in order to survive.
Entrepreneurship is the key to a successful traditional economy. The entrepreneur is the agent who understands the essence of traditional economies and how to translate these values into the twenty-first century. They also understand how to innovate and change the face of day-to-day life through scientific innovation, social capital, and financial management. All of these are necessary for a thriving economy.
On the other hand, an entrepreneur must also understand the nature of nomadic cultures and their necessity for the efficient management of natural resources. Nomadic cultures depend on short-supply chain solutions that can leverage local technologies and social norms. In order to understand the nature of nomadic cultures, one must take into consideration the fact that these societies depend on local animal herds, plant gathering and hunting techniques, art practices, weaving and craft specialization, and food production. Nomadism is the tendency towards adaptation to environmental constraints through a dependence on short-term memory of current situations. Nomadism is the opposite of collectivism. In a traditional economy, collectivization of natural resources and knowledge creation are the main thrusts of economic activity and social organization.