Harvard Business Publishing

Warning: This is my first post of 2009, so please excuse the length.

You know things are dire when one of the country's most influential columnists devotes several articles (and a new book) to parallels between what's happening now and the Great Depression.

Here's Nobel laureate Paul Krugman in his latest New York Times column: "Recent economic numbers have been terrifying, not just in the United States but around the world...Banks aren't lending; business and consumers aren't spending. Lets not mince words: This looks an awful lot like the beginning of a second Great Depression."

How do we, as leaders and company builders, react to such a depressing environment? One option is to go with the downward flow: to cut back, stop taking chances, downsize our ambitions. The other option is to stare the grim economy in the eye and use it as a catalyst for innovation and change.

Economic downturns are as much about psychology as about GNP, as much about withering confidence as about shrinking employment. As individual leaders, we have no control over whether banks will lend or consumers will spend. But we do control our own mindsets and "animal spirits" -- the memorable phrase coined by an even more influential economist, John Maynard Keynes, in the depths of the Great Depression.

Here's Keynes: "A large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive. . .can only be taken as the result of animal spirits -- a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

Translation: If all you've got is a spreadsheet filled with red ink and grim forecasts, it's easy to be paralyzed by fear. But if you've got some leadership nerve, if you can summon those "animal spirits" of which Keynes writes, then hard times can be a great time to separate yourself from the pack and build advantages for years to come.

In part this is a matter of faith -- "a spontaneous urge to action rather than inaction." But it's also a matter of record. The Great Depression was in fact a springboard to a number of enduring product and business innovations that delivered great rewards to those with the courage to unleash them.

In a recent article titled "Design Loves a Depression," Michael Cannell chronicled how the dark days of the 1930s were a golden age of design. A case in point: Designer Russel Wright, who, according to Cannell, "acted as the Depression's Martha Stewart," creating cheap and beautiful furniture that addressed a more frugal and informal consumer sensibility.

Wright's official biography describes his legacy this way: "Russel Wright revolutionized the American home and the way people lived there. His inexpensive, mass produced dinnerware, furniture, appliances, and textiles were not only visually and technically innovative, but were also the tools to achieve his concept of 'easier living,' a unique American lifestyle that was gracious yet contemporary and informal."

Cannell also highlights the legendary husband-and-wife team of Charles and Ray Eames (Ray's full name was Ray-Bernice Alexandra Kaiser Eames), who, "in the scarcity of the 1940s," produced "furniture and other products of enduring appeal from cheap materials like plastic, resin, and plywood." During an era of limited resources, the work of the Eameses, in the words of the Library of Congress, "gave shape to America's twentieth century."

Cannell's ultimate conclusion: "Design tends to thrive in hard times."

And it's not just design. A fascinating white paper by Bradley Johnson, director of data analytics with Advertising Age, makes the connection between dark times and bright opportunities in so many fields. The white paper, titled "Downtime Opportunity," isn't free (it costs $99 to download), but the insights are more than worth the price.

Johnson looked at the lowest point of the Great Depression (August 1929-March 1933), the Great Stagflation of 1973-1975, and the Carter/Reagan recession of 1980-1982. What's remarkable about these three periods of economic trauma, he reminds us, is that the problems they posed inspired creative responses that reshaped markets for decades to come.

One representative example from the Depression: General Motors had to figure out how to maintain its upscale Buick brand in a sinking economy. The solution? Persuade consumers to buy a used Buick rather than a cheaper new car--a way to keep struggling dealers afloat and hold back the progress of rival brands. It was an unheard-of idea at the time--and it reshaped the automobile business and dealer economics to this day.

Johnson also reminds us that it was the upheaval in the airline business during the early 1980s--a frightening combination of severe recession and industry deregulation -- that inspired American Airlines to introduce the exotic concept of the "frequent-flyer" program in May 1981. Sure, it was a creative short-term move to promote brand loyalty. But it forever changed the logic of competition in the airline business.

There are so many other examples of the power of "animal spirits" in a dispirited economy. Henry Luce launched the lavish and super-expensive ($10 per year!) Fortune magazine in February 1930, just months after the Great Crash. It was a counter-intuitive move that became an immediate success -- and went on to become a publishing icon. Luce's successors at Time Inc. launched the frivolous People magazine in March 1974, into the teeth of the worst media recession since the Depression. It too was a hit -- and remains the leading magazine in America measured by ad pages and revenues.

Or consider this reminder from Johnson: "A deep recession can be a perfectly good time to launch an innovative company, putting the startup in a position to move when the economy recovers. Frederick Smith launched Federal Express in 1973 even as jet fuel prices were rocketing. Re/Max, now a major force in residential real estate, began in 1973, just as the housing market was entering a severe downturn...Bill Gates and Paul Allen started Microsoft Corp. in [the recession of] 1975."

So here's my message for 2009: Don't let risky times dull your appetite for taking risk. More then ever, companies and their leaders have to offer a positive alternative to a demoralizing status quo. So why wouldn't you move now to shake up your market and transform your company, especially when rivals are too timid to respond? All it takes is a good idea -- and some animal spirits.