Maslow's Hierarchy of Needs is reviewed in basic psychology and organizational behavior courses. At the most simple explanation, baser needs must be met before higher needs will be pursued.
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Of course, in these same courses the instructor/curriculum then goes on to explain why it's not a very reliable framework. However, in terms of an economic framework for recessions, this can be a very precise framework.
What exactly happens as a recession occurs?
Income loss - Unemployment eliminates or drastically reduces the income of household members
Income reduction - Contractors, self-employed, and small businesses take a hit in income. Stocks and some bonds do worse in recessions, reducing payouts to retirees.
Expectations - Uncertainty of future income and job stability rises. Future income pessimism also increases
Tastes - A variety of tastes change in recessions. For example, conspicuous consumption (cars, clothes, jewelry, etc.) take a hit, even for those who do not suffer a fall in incomes. Evidently, it becomes more socially unacceptable or individuals develop more empathy so that consumers choose not to show or waste wealth in the face of those suffering.
Companies need to understand, ideally before a recession strikes, how will each of these factor into the industry and its products. But what does this have to do with psychology? More than one might think. Expectations and tastes are psychological, not physical changes. Also, the effects of income loss and income reductions cause individuals to readjust and prioritize their spending, either willingly or through asset or credit limitations. Economics is based on the concept of tradeoffs, but when consumers are "doing more with less," a company must know if its products are still part of the package. Nimble and successful reactions to income loss are becoming essential for businesses to survive in recessions. The previous recession saw more innovative and creative strategies than ever before, from creating more dignity and team spirit for temp work to Hyundai's policy of the right to return a recently purchased new car if you lose your job.
I'm not looking forward to the next recession, but the latest iteration of strategy and tactics to maneuver through it will be intriguing to observe. How much has been learned, and how much of it will be forgotten before the next recession?
Of course, in these same courses the instructor/curriculum then goes on to explain why it's not a very reliable framework. However, in terms of an economic framework for recessions, this can be a very precise framework.
What exactly happens as a recession occurs?
Income loss - Unemployment eliminates or drastically reduces the income of household members
Income reduction - Contractors, self-employed, and small businesses take a hit in income. Stocks and some bonds do worse in recessions, reducing payouts to retirees.
Expectations - Uncertainty of future income and job stability rises. Future income pessimism also increases
Tastes - A variety of tastes change in recessions. For example, conspicuous consumption (cars, clothes, jewelry, etc.) take a hit, even for those who do not suffer a fall in incomes. Evidently, it becomes more socially unacceptable or individuals develop more empathy so that consumers choose not to show or waste wealth in the face of those suffering.
Companies need to understand, ideally before a recession strikes, how will each of these factor into the industry and its products. But what does this have to do with psychology? More than one might think. Expectations and tastes are psychological, not physical changes. Also, the effects of income loss and income reductions cause individuals to readjust and prioritize their spending, either willingly or through asset or credit limitations. Economics is based on the concept of tradeoffs, but when consumers are "doing more with less," a company must know if its products are still part of the package. Nimble and successful reactions to income loss are becoming essential for businesses to survive in recessions. The previous recession saw more innovative and creative strategies than ever before, from creating more dignity and team spirit for temp work to Hyundai's policy of the right to return a recently purchased new car if you lose your job.
I'm not looking forward to the next recession, but the latest iteration of strategy and tactics to maneuver through it will be intriguing to observe. How much has been learned, and how much of it will be forgotten before the next recession?
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