The Tao of Recessions

One of the many features of our great free market capitalist world that we started to build with the advent of the industrial revolution is the unbreakable faith in progress. The belief that our lives will get better, our economies bigger, our knowledge greater, we will just keep having more and more of everything. Anything that challenges this view, even if only temporarily, is seen as something unnatural. There are many critics of this view, alarmists and doomsayers calling on us to reject the whole system and return to a simpler life.  They see our material progress as immoral, irresponsible and dangerous. Then there is the business cycle, the periodic changes between expansion and contraction. The advocates of progress see the contractions as necessary evil, the cost of progress that we have to endure time to time. The critics see them as the vindication of their ideas, the proof that eventually everything will go to hell and we will suffer the punishment for our wicked materialistic ways. Both sides see them as a bad thing; neither sees the value in recessions. Socialists of all parties also feel vindicated as this ‘proves’  that the free market does not work, that there is a need for their intervention, their positive actions to save us from the unpredictability of the market and the harm recessions cause. We should learn to appreciate recessions. We should start to see recessions in a Taoist way, not as hiccups of linear progress, but as natural phases of cyclic change. For the Taoists, Yin and Yang are not good and bad, they just represent the two different forces of nature that have to be balanced. Black and white, hot and cold, wet and dry, day and night, active and passive, positive and negative do not have intrinsic values; they are just two sides of the same coin of reality; a reality we need to understand before we can find the best way to deal with it. The Taoists also believe that we should not fight, we should not resist the forces of the universe, we should adapt to them, we should  always try to use them to our best advantage. The  boom  is the Yang phase of the business cycle while a bust is its yin. The problem with our world-view is that when things go from the Yang way toward a Yin way, we think that something is wrong. We desperately wish to hang on to our linear notion of progress in which every slow-down is an abnormal thing that needs to be corrected as soon as possible. Even we, libertarians, who understand the need for recessions tend to see it in negative terms. We see recessions as the time when the excesses of the boom are corrected by allowing the weakest players to fail, a time to cut back to prepare for the next 'growth' phase. We understand that only real savings can lead to real new investments, that the longer and harder we try to hang onto the boom, the longer and harder the bust will be. The bad times of a recession is the price we have to pay for the good times of the boom. Having such a negative view of recessions is what makes it so difficult to argue with the statists who will not hesitate for a second to use it as an excuse to expand their power through their proclaimed effort to 'help' us. When times are good, their excuses are demands for more equality, social justice and other such terms of BullSpeak; but when times are bad, they feel truly empowered. Socialists revel in misery. It allows them to show concern, an earnest desire to help, to correct the 'failures' of the free market. In some ways they are right; planned economies do not suffer from the boom-bust cycle. Just look at Cuba and North Korea. When we praise the free market, when we talk about its merits as opposed to the stagnating misery of planned economies, we point to its successes in providing prosperity.  But if that is true, if that is its only benefit, than it is fair to hold it responsible when it fails to fulfill that promise. What we have to show to effectively counter the claim of failure is not just pointing out the merits of creative destruction. What we need to argue is that recessions are not inherently bad, that they are virtuous and desirable and that we should learn to embrace them as that is the best way to get the most out of them. Let's take a quick look of the wonderful things a recession can bring to us:

Consolidation

Any strategist from Sun Tzu to Clausewitz will extol the need to consolidate the gains of any advancement. In economic booms we invent, we venture - in recessions we should consolidate. Drop what we do not really need to do, sell the machines we no longer need, close the office that is not used to its full potential. Consolidation is not a retreat; it’s a reestablishment of full control over our environment and our resources.

Order

Booms are inherently messy. When you want to be the first to put that new product onto the market, you are too busy working out the glitches, working on the marketing and the gazillion little things that are needed to start just about anything. When you are busy selling, or doing whatever your business is, you do not have time to do what is not absolutely necessary. When there is a slowdown, there is time to build a solid structure behind whatever you do.  To find savings with your suppliers, to improve your warehousing, to clean up that stupid computer in your home business, to clean up the basement and put the shelf there so that you can organize your tools.

Productivity

Booms are times for inventions, busts are for productivity gains. Yes, of course, productivity gains are often results of inventions, but what we are talking about now is an attitude. When times are good, we can afford to experiment, we can afford to try new things but it is just as valuable to make what we already have better. Cutting costs, improving existing processes and eliminating inefficiencies also increase productivity. We should embrace the idea not just out of necessity, but as the most appropriate action in slow economic times. What makes you money during a slowdown is not the latest and greatest invention, but the one that help you cut cost on producing.

Reconnecting

Trying innovative marketing campaigns, expanding into new markets are for times of booms. Reconnecting with your customers, improving your service, passing some of your savings onto them is the appropriate behaviour for recessions. That is the time to understand how dependent you are on them. Just as you are dependent on your suppliers with whom you can strengthen your bonds now more than ever. The market is the ultimate social institution and a recession is the time to cultivate your business relations.

Learning

In a way, everything you do in a recession is a preparation for a new boom. Healthy companies come out stronger from a recession. You are supposed to analyze and learn from your actions during the boom to gain a deeper understanding of the success and the causes of the slow-down.

Savings

Businesses in a boom can expand by borrowing. By taking risk, by hoping that the return will cover the expenses. When the bust comes, neither the sales nor the credit will be there. It's easy to say that you should save when you can hardly pay the rent for your business, yet saving is exactly what we should all be doing. The only solid investment is the one based on savings. In times of recessions, the natural instinct of your customers is also to save which will create in a healthy economy the foundation for the next boom.

Improving Labour

Losing your job in a recession is no fun, but you should consider the fact that not everybody does. If you lose yours, there is some soul searching to be done. Maybe you are not as good as the ones who kept theirs, maybe you are too expensive or maybe you are in the wrong business. Dying industries suffer the most in recessions and all businesses close down their  least profitable units and lay off their least productive workers first. Recessions forces workers to deal with the inevitable while helping employers to strengthen their work force by retaining the best workers. ~~~~~~~~~~~~ What we should never do in a recession is what our politicians are doing: spending beyond our means. Spending with the phony promise that we can keep the party going forever, that we can avoid the undesirable is not only stupid and irresponsible but outright immoral. Recessions are the virtuous parts of business cycles and we should welcome them for all the good things they do to us.

The Causes of recessions

I am saying all this even though the idea of the naturally occurring ‘business cycle’ never made too much sense to me. Not the fact that individual businesses can go through phases and cycles, but the idea of the all-out business cycles affecting the whole economy. All-out effects must have all-out causes. These all-out causes are not that difficult to find: the filthy hands of the government can be seen in just about any boom and bust we look at. Loose fiscal policy, self-serving monetary policy, preferential treatment of some industries and business sectors, all sorts of price distortions, etc. Recessions should be the times when the state is called out on the enormous harm it causes, yet the opposite tends to happen. The state usually gains more power in recessions than it does in boom times. If you look through the many theories of the business cycle, what you will find is that it is used by every single school of economics as the proof of their theories and justification for their recommendations.  You will also find that it was a socialist idea to begin with, justifying the demand for more involvement of the state in the economy. In the end, it all comes down to the narrative and that is where we, libertarians, are losing. What I am suggesting here is that first, we should never be defensive about it but use recessions to point a finger at the real culprit: the state; and second, to point out that regardless of the cause,  recessions are not bad, as they help to reacquaint us with reality which is never a bad thing. Recessions should be an asset in our argument against the state, not a liability.