Custom essays on Microeconomics: Consumer spending in the 1920’s compared to 2010

The growth of population and its prosperity in the beginning of the 20th century led to a sustained advance in economy. Western countries started the era of mass assembly line production of basic goods; scientific and technological revolution in the mid-century gave a new impetus to rapid development of production. It resulted in greater quantity of goods than people could consume. Under these conditions, the problem of distribution gradually becomes central in several industries. This led to the situation when producers had to fight for consumers. Robert Keith (1994) called this shift in the Western companies’ strategy the marketing revolution.
The fact that the commodity recessions cycle began to emerge in the beginning of the 19th century is not accidental. At the dawn of the banking business banks more or less consistently followed the practice of full backup of banknotes and demand deposits, then this practice gradually changed to the banking practice of partial redundancy. This increase in money supply dramatically changed the behavior of the economy players.
In the 1920’s the railroads construction was carried out, people spent a lot of money to purchase new consumer goods, and as a result, the construction, automotive and other industries experienced an extraordinary rise. Entrepreneurs started new projects and expanded production, believing that money quantity growth meant the growing demand for their products (Dow, 2000). However, the problem was that the amount of real resources in the economy did not increase only because the banks emitted unsecured money.
The studied merchandise recession took place after the crisis of 1920-1921. During the decline of 1920-1921 the industrial production fell by 25% and changed to a revival in the second half of 1922. By 1923 the industrial output, companies’ incomes and workers’ wages exceeded the pre-crisis levels, while unemployment dropped from 4.8 million in 1921 (11.2%) to 0,7 million in 1923 (1,7%) (Hill, 1997).
However, during the rise many branches of the economy grew too much and had to reduce equipment and workers. In addition, in the recovery period the demand for labor increased, and wages also rose slightly more than the normal development of the economy allowed. The depression was inevitable, and it came in October 1929. It all started with the collapse of the stock market; stock prices fell by more than twice. Companies in practically all industries, witnessing the sales decrease and the formation of unsold stocks, sharply reduced the demand for new materials and generally halted the purchase of capital goods. Even those, who did not lose their jobs, reduced their demand and did not risk buying a car on the installment plan or a house on the security of their property. Within a year after the start of the depression the GNP fell by 20% and by the spring of 1931 by 30% (Hill, 1997).
The financial crisis of 2008 is characterized by deterioration of the main economic indicators in almost all countries of the world. Its predecessor, the mortgage crisis in the United States of America, revealed in 2006. The situation started from the reduction of the number of houses sales. Then, in 2007, this issue developed into the credit crisis. Anyone could get the credit for almost any product. The great number of people started using the service of purchasing in installments. At that time it seemed an advantageous offer. Lack of control over the number of loans led to the globalization of the problem and to the financial crisis.
Consumers reacted to the global financial crisis differently. Steve Hales, the Director of Global Quality Research at Synovate, stated that the difference is surely large enough in dependence on how different the consumers are as such. In order to better understand the spectrum of sensations caused by the recession, Synovate attempted to group customers in 14 countries by their reaction to the crisis. Post-crisis types were allocated in several categories (Overcoming the financial crisis and the macroeconomic downturn, 2009):
The first of them is represented by positive-minded Opportunists. This type includes active, creative, innovative and motivated people. They have higher education, financial stability; the scope of their duties is limited, mostly due to their youth (25-35 years, as a rule, single or married without children). These people are interested in the premium segment products, but approach their purchases carefully and wisely.
The second type involves Lifestyle Re-evaluators. This type includes relatively few consumers, belonging to the middle class and upper-middle class. They are convinced that the responsibility for the crisis lies on the society, so the society should correct its effects. A recession is considered by them as an opportunity for social changes. These are typically people with an active life position, not wishing to reuse from pleasures despite the crisis.
Another not numerous type is Confident Ignorers, to which wealthy people from the U.S. or Europe mostly belong, as well as some layers of the citizens of India, China and Thailand which were almost not affected by the crisis. Their perceptions, values and purchasing behavior have hardly changed and keep the same as before the recession.
According to the researchers, the most common type distributed worldwide, is Cautious Savers, people at the age of 30-50 representing middle class. These consumers have higher education, but low level of flexibility in relation to their job. The crisis had a strong influence either on themselves or their friends and relatives. They have drastically reduced their expenditures, postponing big purchases until better times.
The last type includes Angry Pessimists, for whom there’s a significant gap between the way of their lives before and after the crisis. They lost their jobs, savings, or business, and, obviously, their life in the past was better than now. Typically, consumers belonging to this type are middle-aged and older people, living in the U.S., UK, Germany, France, Spain, South Africa and Russia. They feel lost, terrified and angry at their governments and corporations, believing that nothing can be changed (Overcoming the financial crisis and the macroeconomic downturn, 2009).
In general, both examined periods of recession are described through a similar mechanism. The unexpected reduction in demand acts as a “first impulse” in the development of recession. Reducing the demand for capital goods is expressed in a shift of demand curves to the left and the decline in volume of sales. At the same time, companies reduce the demand for labor and fire “extra” number of workers, who are forced to look for a new job in another industry. In addition, equipment manufacturers start buying less intermediate goods, and this leads to the fact that the producers of these goods also have to reduce the quantity of staff (Dow, 2000).
Further development of recession is caused by two factors. First, the unemployed sharply reduce their consumption during the time of searching for a new job. They surely do not stop buying most essential goods, but they may stop buying many of the benefits of non-essentials. The total market demand of consumer goods decreases by some amount. Companies, for the products of which the demand decreases, are forced to reduce the number of their workers, who consequently reduce their consumption while looking for a new job. This, in turn, reduces aggregate demand, and so on. This fall in market demand for goods is based on the principle of chain reaction: worsening in one sphere generates worsening in another, and an increase in unemployment is cumulative.
Secondly, the expectations of companies and consumers are changed. Companies make decisions on investments, counting on some future volume of demand for their products. In this case, there is considerable uncertainty in future events and the risk of incurring losses. Decisions concerning spending large sums of money are very sensitive to small changes in expectations about future events. And if the company starts being afraid that the demand for its products is low in the future, it will not buy new capital goods to maintain or expand production. The size of investment is the most sensitive and volatile component of total demand on goods markets.
Similarly, the demand affects the expectations of consumers, who are afraid of losing their jobs, and may delay big purchases and save the money just in case. Therefore, the demand on markets of capital, consumer goods (houses, cars) are also very sensitive to expectations. Thus, the cumulative decrease in demand and change in expectations greatly enhance the decrease in demand on all the markets and lead to the emergence of production recessions (Dow, 2000).
The issue of how quickly the economy can cope with such recessions depends on peculiarities markets. In general, it should be marked that the economies, directly or indirectly serving the consumer demand in the United States, will experience difficult conditions in the coming years. The only way to reverse the consequences of cyclic recession in the U.S. is to develop domestic markets. The successes of these countries in this direction will determine the rate of recovery of world economies after the rapid reduction of exports, consumer and liquidity crisis.
References:

Dow, C. (2000). Analysing major recessions: an analytical summary of a new study of large recessions in the twentieth century. National Institute Economic Review, 167, 70 – 85.
Hill, R.P., Hirschman, E.C., & Bauman, J.F. (1997). Consumer Survival during the Great Depression: Reports from the Field. Journal of Macromarketing, 17, 107 – 127.
Keith, R.J. (1994). The Marketing Revolution. In B.M. Enis & K.K.Cox (Eds.), Marketing Classics. A Selection of Influential Articles (pp. 38-42) (the 8th ed.). Prentice Hall.
Overcoming the financial crisis and the macroeconomic downturn. (2009). OECD Economic Surveys, 2009 (11), 10-40.