Sunday, January 25, 2009

Recessions-Good Times For New Businesses?

Interesting article about how many new businesses are started during recession, including many companies that are now very large, such as Microsoft, General Electric and CNN.

Of course, there are a lot of new businesses started during booms as well but this illustrates that it can be done during recessions as well. But how is that possible considering how credit conditions are tighter and "aggregate demand" falling? The article does not try to answer that.

The answer can be found if you consider Austrian theory, including that of proto-Austrian Jean-Baptiste Say. The cause of recessions isn't "insufficient aggregate demand" as there are always needs and wishes that aren't met. The problem is instead that factors of production have been wasted through malinvestments, so that people cannot offer the goods and services needed to buy the goods and services they want. Demand is in other words lower because supply is also lower. And the reason supply is falling is because factors of production aren't used because they have been diverted to malinvestments.

But while people have increased difficulty to afford the things they want, the increased amount of unused factors of production also means that entrepreneurs will have more means at their disposal to satisfy whatever desires people can still afford to meet, thus to some extent counteracting the effects of lower production of other goods. And once there is a more general economic upswing, those astute entrepreneurs that acted during the slump will still have those extra factors and make it easier to for them to expand than if they had started their businesses during booms when there are shortages of workers and capital goods.

It can be argued whether really recessions are a better time to start businesses as the article claims. But clearly it is not as difficult as Keynesian analysis would suggest, and the explanation for this can be found using Austrian analysis.


Blogger Wille said...

I believe there are several factors playing into recessions being a good time for new businesses:
The competition is likely hampered, the cost of good labour is depressed (as opposed during a boom when even incompetent people are expensive), the cost of marketing and advertising dramatically falls are just a few reasons why a recession is a good time for market entry.

Besides, as an entrepreneur, depressed demand is not as big a problem as it is for a large company: you are basically starting from zero, so ANY demand is good and some of it is likely to fall your way if the product and offering is good enough.

12:14 AM  
Anonymous Yancey Ward said...

A useful analogy is the forest fire and the room it creates for new growth.

3:43 AM  

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