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How Recessions Help Build Prosperity

Most of us take a pretty simple and straightforward view of economic conditions: expansions are good and recessions are bad. But the reality is more complicated. More than 300 years of capitalism have taught us a few things. One of them is that recessions are a normal part of the business cycle. You have winter and summer in the natural year, and you have recessions and expansions in the economic cycle.

In expansions, both businesses and individuals tend to get a little bit lazy. If something worked last year, we are ready to try the same thing this year. Banks get careless making loans, because in good times almost all loans are likely to get repaid.

But bad times often bring out the best in people. People have to be smarter and come up with new ideas. Workers who have lost their jobs may try to start a business. Or, as we can see from this story in the BBC, people try to invent things. According to a recent poll:

A third of respondents claimed that the recession has increased the amount they were coming up with inventions and innovative, money-saving solutions.

A third of those with a bright idea were learning more about science and technology to help refine it.

One in 10 had looked into or applied for a patent in the last year.

In the UK today, where the economy is even worse than in the US, a lot of people are trying to figure out how to make the next hot gimmick. Some of them will figure it out.

Politicians and economic policymakers keep trying to make expansions last forever and recessions go away. We wish them well, and in general we’d rather live in a permanent boom than anything else ourselves. But the business cycle is pretty deeply embedded in both human nature and the capitalist system, and we don’t expect to see it end any time soon. The trick for countries, companies, investors and individuals is to know how to make the best of any kind of weather. Use the good times to prepare for the bad, and use the bad times to lay the foundations of the return to prosperity that lies ahead.

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