A traditional economic system definition would have to be, “A society that operates under the law of private property and markets based on contractual agreements.” It is a free-market system, in that the government plays a minimal role in maintaining the flow of commerce or production. The traditional economic system definition may also include elements of protectionism, for instance, “the government limits the ability of a nation's natural resources to become proprietary assets, limit the amount of land required for economic development, or restrict the distribution of goods and services.” These systems limit economic freedom and inhibit mobility, while providing relatively high levels of security.
A more inclusive definition would include elements of all three of these perspectives. For instance, a protectionist economic system definition might include provisions limiting the freedoms of individuals and the abilities of a nation's natural resources in order to protect those freedoms. Or it might emphasize the need for traditional economic system definition in order to protect the rights and freedoms of all humans, without which a civilization cannot develop.
In recent years, however, traditional economic thinkers have begun to question the long-standing assumption that markets are inherently conservative. They now recognize that markets can be efficient in delivering goods and services when the government provides appropriate regulation. Traditional thinkers also realize that government regulation of traditional industries and markets can produce positive results and help overcome some of the most formidable challenges of our age. And traditional thinkers recognize that traditional businesses play a critical role in promoting economic freedom and economic prosperity, by ensuring that the government serves as a restraint on corporate power.
What's missing in a traditional economic system definition is the concept of comparative advantage. For example, how do you get from having the most money per unit produced by a traditional industry to having the most overall value added product? And this is just the start of the issues involved in traditional economic theory. There are certainly many more issues than can be presented here.
The key concept in traditional economic theory is the production function, which says that an economy can achieve a certain level of output as long as certain inputs are present. In other words, it defines a traditional economic system as determined by the existing structure of inputs into the production process. It is also important to recognize that traditional economic systems are usually defined as those which are based on a limited number of physical resources. In other words, traditional economic systems are often referred to as “closed economy” systems, for the reasons that there is little scope for systemic risks posed by the interaction of numerous economic players in a system. In fact, a traditional economic system definition may sometimes also include some elements of open economy theory, which postulates that the system can be efficient if certain institutional features are allowed to exist.
But what if the definition of a traditional economic system excludes elements that are considered necessary for a robust open market? For example, suppose that the definition of traditional economy omitted the role of consumers, which forms the essential element of price determination in any open-market economy. If this were true, then the definition of traditional economy would essentially be a definition of a closed economy, in which the costs of production are borne by the producers of marginal commodities. For a sound definition of the traditional economy, a consumer economy should be included.
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