I know what you’re thinking. How can high unemployment rates, declining stock markets, and less cash to spend possibly lead to anything positive?
But the truth is, recessions are part of a normal economic cycle and a necessity in capitalist societies.
So looking beyond the negatives, there are three main reasons why a recession is beneficial:
- Overall shift in mentality & change in attitude (for the better)
- Growth and innovation in emerging sectors & shrinking of overcrowded, bloated sectors
- Opportunity for self-evaluation
Overall shift in mentality & change in attitude
First off, a recession naturally shifts everyone’s behavior from being irresponsible, irrational spenders to frugal, prudent penny pinchers who make better financial decisions.
From abstaining from making unnecessary purchases to reevaluating the resale value of all that junk that’s been accumulating in your closet, it’s a great chance to stop the inflow and reassess.
Depending on how dramatic this shift is, this type of thinking can have lasting impact on a country’s consumer spending habits. If you spend some time with older relatives who have lived through the Great Depression and World War II, you can tell that the decisions they make and the perceptions they have of the world are deeply affected by their experiences living through hard times; they tend to be more resourceful and frugal.
Likewise, a recession that hurts a little will likely serve as a reminder to keep finances in order. Saving a little cash here and there certainly won’t hurt you in the long run. On a larger scale, when millions of people collectively experience a deep recession, attitudes will change and a much wiser, financially responsible populace will be borne.
Growth and innovation in emerging sectors & shrinking of overcrowded, bloated sectors
From an academia standpoint, a recession is a period when the excess “fat” is removed and cleaned from the economy, paving the way for another expansion. Until this purging is complete, the economy will be less efficient and will continue to drag along.
In theory, recessions hurt both companies that have made bad decisions by putting them out of business and incompetent workers, whose blunders put their own firm at risk. In the process, laid-off employees intuitively find other work at firms in underdeveloped sectors that are in need of more labor, or even start their own businesses. Thus, work is distributed more efficiently elsewhere in the economy where there is more demand both for labor and innovation.
In the process, the weaker players in a bloated sector do not survive, while the stronger businesses that do survive will become leaner and more efficient. The perfect example is the collapse of the Financial Services industry. There were simply too many pigeons fighting for that last breadcrumb, which led to excess risk taking and dubious practices. Eventually, something had to give, and the financial sector contracted.
Of course, this is not always a perfect system. In the case of an extreme recession, the contraction of one sector is so violent that it can negatively impact other industries as well. Startups can suffer when there’s a lack of capital flowing in the funding ecosystem.
However, generally, recessions do function as a way of correcting and rebalancing an economy, which will help young companies pioneer new industries. Historically, economic downturns have been characterized by an increase in the number of startups. Thus, recessions have a way of sparking innovation and pushing technological limitations forward.
Opportunity for self-evaluation
Last but not least, recessions allow us to take a step back and reevaluate ourselves. When the hottest industry or the most popular profession becomes no longer the highest paid or most glamorous, what path would you take?
In this sense, recessions allow people to pursue their true passions, making work more meaningful, leading to higher productivity and a more enjoyable lifestyle.
Too many of us get stuck in the daily grind and struggle to get out of it.
Ironically, a recession may be the perfect cure for an ailing economy.
I’ve noticed a couple of trends in consumer behavior as Web 2.0 has evolved. The first is the influence of curation in consumers’ purchasing decisions. Sites like Fab, Etsy, AHAlife, and the hundreds of monthly subscription based services (Birchbox, Craft Coffee, Lollihop, etc.) all essentially hand pick items that they think their subscribers/customers/users want.
Consumers are no longer searching for items that they need through search engines, but being introduced to items that they may want. This is a fundamental shift in consumer behavior. Curation is the new search.
Another strong trend is a deepening, more personal relationship between the consumer and the brand or the designer/manufacturer. Sites like KickStarter provide an opportunity for anyone to develop a relationship with the designers or makers of a wide range of products. For months, project creators update backers on the manufacturing processes, milestones, any unexpected delays, etc. By the end, the consumers have a greater attachment to the product they backed, since they helped the project creators build the final product.
On a broader scale, consumers are engaging directly with brands through Twitter and Facebook before they pull the trigger on a purchase. An inactive Twitter account or Facebook page could seriously hurt a brand’s image. For brands, engaging with current and potential customers humanizes their brand, making each relationship more personal.
There’s no doubt in my mind that these two trends will continue.