Cultural Shift is one positive result of a painful recession
June 7, 2009
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Recessions force changes, especially in human behavior. Will we, as individuals, learn anything from this recession? We can be quite sure that it will change us in the short term but we really don’t know how it will affect us in the long term. Perhaps lessons from the past and insights from others may be instructive.
More than 225 years ago, Adam Smith – the economist best known for explaining the role of self‐interest in market economies – contributed to the understanding of how people relate to one another and the economy. He believed that most people are not motivated primarily by accumulation of personal wealth, but rather by harmony in personal relationships and balance between income and spending.
Many observers of the economy believe that personal spending and debt have been out of control for years and did not conform to Smith’s philosophy of balance. This recession initiated a “reality check” that has sparked a dramatic reduction in debt and borrowing. Savings are up and citizens seem to be taking a different approach to accountability, responsibility and personal goals. A recent Money Magazine survey shows that 89 percent of the respondents say they have changed how they manage money, including cutting back on luxury purchases and looking for discounts; 88 percent said they will be more frugal and 73 percent said they will play it safer with money and focus less on materialistic gain. In effect, the typical citizen is looking to get “back to the basics.”
Bill Gross, CEO of PIMCO sees thrift as the new mentality and expects that it will be 10‐20 years before we see risk taking reach the same levels we saw just a few years ago. Past recessions would confirm this outlook. People became less likely to take risks and more likely to save. These changes in behavior tended to last up to ten years. The more severe the recession, the more pronounced the change in behavior. The Great Depression was the mother of all recessions for modern developed economies. Stock market values dropped 80 percent, almost half of the countries’ banks failed, manufacturing output fell by more than 50 percent and unemployment reached 25 percent. People who lived through the Great Depression vowed never again to experience this type suffering; they became more frugal, budget conscious and avoided speculative investments and debt.
Its long term effects are interesting. Glen Elder, Jr., in an exhaustive study of the children of the Great Depression, found that those who grew up in that era were more resilient and flexible than other generations. The children of the Great Depression were more likely to seek support through marriage and families, and generally did better than one would normally predict.
Some observers of the current recession point to the likelihood of a cultural shift, where people establish new goals and relationships that will prevail long into the future. Their predictions include the building of stronger relationships with neighbors, friends and family, less materialism, more reflection and more leisure. It is much too early to measure any changes of this sort or to predict if it will occur. Yet, the April 27 issue of Time Magazine indicates that, at least in the short term, there is an interest in change; it cites people who reflect on the recession with more resolve than regret, who predict that even when prosperity returns they will spend less. They view the recession as an opportunity to learn and to gain from it rather than to lose. Without denying the cost of this recession to millions of people, perhaps the silver lining of it will be an increased commitment to individual financial responsibility and stability.
