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Why it’s smart to be optimistic

Sure, it has been a harrowing storm. And now is no time to discount the dangers that still exist. But opening your mind to optimism can help you seize the opportunities ahead
/ Source: Business Week

The U.S. economy is in such bad shape that the loss of (just) a quarter-million jobs in July was greeted as good news.

Long-term unemployment and foreclosures continue to mount in the worst economic downturn since the 1930s. Health-care costs are out of control. An aging population around the globe is driving government spending through the roof. And scientists say we need an expensive crash program to fight global warming or we'll incinerate ourselves.

It's little wonder that despite some positive news lately, the daily Gallup Poll on U.S. economic conditions as of Aug. 11 found that 53 percent of Americans think the U.S. economic outlook is getting worse (yes, even worse), vs. 42 percent who think it is getting better.

But before you assume a purely defensive posture — knees pulled to chest, hands on head — remember this: Just as people become overly exuberant in good times, they tend to get too pessimistic in bad times. While the economy remains deep in a hole, and could indeed get worse, the truth is that nobody really knows what will happen next. Prudence demands that you prepare yourself for all possible outcomes, including some highly positive ones.

Anything could happen, right? It was the inventor Thomas A. Edison who said, "We don't know a millionth of 1 percent about anything." Latter-day management expert Paul J.H. Schoemaker, founder and executive chairman of Decision Strategies International, a consultancy in Conshohocken, Pa., agrees. "Just as the downside surprised many people, the upside might also come as a surprise to people," Schoemaker says. "For businesses, the idea is to not get locked into the current reality, but realize that the system is quite volatile and can quickly turn. You want to have strategies that can make you win, no matter what happens."

In other words, you owe it to yourself at least to consider the case for optimism. No, not starry-eyed, Panglossian optimism. We're simply arguing that practical people should open their minds to the opportunities to be seized just as much as to the dangers to be dodged. As futurist Esther Dyson of EDventure Holdings put it in one of the many interviews we conducted for this Special Issue: "Part of being optimistic means you really need to understand the problem and be cynical enough that you're not foolishly optimistic. Then you're not disappointed when things don't work out. A lot of people just think truth and beauty will win out and it's easy. It isn't."

The case for rational optimism has two parts: First, recessions such as this one, painful as they may be, can set the stage for future growth. As economist Joseph A. Schumpeter wrote in 1942, "creative destruction" shakes loose people from old, dying businesses and forces them to figure out new ways to be useful. Second, ingenuity is additive. Equipping one or two billion more of the world's people with higher education and better technology over the past couple decades has increased humanity's ability to solve hard problems. The next world-changing breakthrough may come from China, or India, or Eastern Europe.

Of course, some people don't need any prodding to take chances. They're the pioneers who brave arrows while the rest of us wait back at camp. Take Mary Pruitt. The 56-year-old, a lifelong Kansan, was laid off in 2006 from a project management job at Agilent Technologies (A). Soon after, an inventor she knew asked her to co-found a company to commercialize his idea for cutting emissions of cancer-causing particulates from diesel engines. (The concept: Use a spark in the air intake to create ozone gas, which oxidizes the fuel more thoroughly.) Pruitt was so impressed by the early test results that over the past two years she put the entire $300,000 or so from her severance payment and 401(k) into the Pomona, Kan., startup, which they called Emission Control Solutions.

Emission Control still has no money coming in the door, but independent laboratory tests have demonstrated big reductions in tailpipe particulates. Pruitt is convinced that the ozone generator, dubbed the Radiant Halo 7, is a huge winner. And just think, she says, "if I had not been laid off, I would absolutely not have gone forward on this."

We're not advising people to pour their life savings into automotive gadgets. But keep in mind that risk-takers like Pruitt and the inventor she backs, a 68-year-old, self-taught tinkerer named David Clack, are responsible for a fair share of scientific and technological advances. "We would not be where we are if our ancestors had not been kind of crazy," says Edward Tenner, a historian of technology and culture and a visiting scholar at Princeton University and the Smithsonian Institution's Lemelson Center.

There's a misconception that pessimism is prudent because you can never go wrong by assuming the worst. Today, business executives are hoarding cash by cutting jobs and investment, mostly ignoring the positive signals emanating from the stock market. In fact, getting stuck in a rut of pessimism can be just as harmful as wild-eyed euphoria. The decline of retailer Montgomery Ward can be pinned in part on the pessimism of its cantankerous chairman, Sewell Avery, who was so convinced that the U.S. economy would sink back into Depression after the end of World War II that he refused to build new stores and lost market share to fast-expanding Sears.

Schoemaker, the consultant on decision-making strategies, says executives must fight the tendency to assume they fully grasp future risks and opportunities. "Ask people not just what they know but what they don't know, what they're not so sure about," he advises. Also, cultivate the ability to pick up the faint stirrings of change, even without knowing quite where to look for them. Look everywhere at once, advises Schoemaker, by using what the FBI calls "splatter vision" — a deliberately undirected concentration that allows the prepared mind to detect subtle irregularities like a hand in a crowd moving toward a gun. Says Schoemaker: "The future manifests itself at the edges. The hardest thing to do in scenario planning is to get the periphery into the picture."

The optimistic scenario is that the recession is correcting the excesses of the euphoric bubble years, when the global economy was on an unsustainable path. Americans were overspending on big houses and cars, and the nation was paying for an unaffordable lifestyle by issuing IOUs to trading partners such as the Chinese. That had to change — and now it has.

Leave it to an adman to put a nice gloss on the idea: "I think we're ushering in a new era of doing better with less," says Roy M. Spence Jr., chairman and CEO of Austin, Tex., advertising agency GSD&M Idea City.

Shortly before he died on June 5 at age 90, economic consultant Peter L. Bernstein wrote an article for the July/August issue of Harvard Business Review in which he argued that getting whacked on the nose was good capitalism. People are no longer taking crazy, overleveraged risks, so they're less vulnerable to blowing up again, Bernstein said. "For these reasons," he wrote, "instability leads inevitably to stability."

Optimists see the recession as a forest fire that clears out dead brush, making room for new growth. "I think crisis plays a wonderful role in capitalism. It's exactly what allows you to grow faster over time relative to other economic systems that don't allow the dips," says James W. Paulsen, chief investment strategist for Wells Capital Management in San Francisco. When the crisis struck last year, he says, "we totally paralyzed our healthy homes and households into inactivity. If they're still in O.K. shape, then this thing could turn around quicker and start growing better than people imagine."

Even the drying up of capital for new enterprises in this recession, while generally negative, has a positive aspect. It forces entrepreneurs to be more efficient and lets them keep more of their companies' equity, says John Dietz, co-founder of startup Adometry, which measures the effectiveness of Internet advertising. Bravely, he and co-founder Robert Perrier announced last September, at the height of the financial crisis, that they were leaving well-paid jobs at Walt Disney Internet Group to launch Adometry. As stocks plunged 25 percent in the following weeks, says Dietz, "There were times when we thought about saying, 'You know, we were just kidding about leaving.' " Instead, they stuck it out. Now Adometry is just about ready for prime time.

Adometry illustrates the ongoing benefits of technological progress. Dietz and Perrier found they were able to develop their data-intensive ad monitoring technology cheaply by harnessing the power of something from called the Amazon Elastic Compute Cloud — essentially, high-powered computing available as a service on the Web rather than as a bunch of expensive boxes. Says Dietz: "A lot of the stuff we're doing now would have been impossible even five years ago."

Recessions can be fertile times for invention. "Bad news is good news to the prepared," says Hilary U. Eledu, a divisional head of the Nigerian investment bank BGL. Unemployed people like Mary Pruitt suddenly have time on their hands. Resources such as office space and lab time can be had more cheaply. And shaken-up companies are looking for better ways to solve their problems. Indeed, history is replete with companies and products that were invented or launched in bad times, from Tide detergent to the Xerox machine to Microsoft. Here's an impressive stat: From February 2007 through February 2009, despite the recession and bankruptcies, California witnessed an 11 percent increase in the number of corporations, limited partnerships, and limited liability companies registered in the state.

When Bill Gates dropped out of Harvard at age 19 to co-found Microsoft with Paul Allen, the nation was still mired in the recession of 1973-75. "It didn't even cross our minds that was relevant to whether we should be doing what we were doing," recalls Gates. "We thought what we were doing was a miracle."

Gates, now a philanthropist, hasn't lost the optimism he had back when, as he recalls, "I couldn't rent a car because I was too young, and I couldn't get a credit card." Says Gates: "People drastically underestimate how innovation will come along and improve things." For example, he says new vaccines in the pipeline and other factors "give us a very straightforward capability" to cut the mortality rate for children under five by half in the next 20 years.

The second part of the case for optimism is the idea that the expansion of a global, educated, technologically well-equipped middle class is a force for progress. The U.N. Educational, Scientific & Cultural Organization (Unesco) says the number of students worldwide pursuing post-secondary education (including occupational training, college, and professional training) quintupled from 29 million in 1970 to 153 million in 2007 while the world population less than doubled.

It's easier to be optimistic if you adopt an international perspective, since there's a good chance the U.S. will not dominate the 21st century the way it dominated the 20th. Economic historian Angus Maddison of the University of Groningen in the Netherlands predicts that through 2030, per capita gross domestic product is likely to grow more rapidly in China and India (4.5 percent a year) than in the U.S. (1.6 percent).

Many Chinese and Indians agree that power is shifting in their direction. "I think the United States' power is going to decline, relatively speaking. I have no doubt about that. Whether that is good for the world or bad for the world, it's too early to tell," says Lanxin Xiang, a professor of international history and politics at the Graduate Institute of International & Development Studies in Geneva and a columnist for the Chinese government-backed newspaper Global Times.

A relative decline in America's standing would be a blow to U.S. pride. It could be destabilizing as well if it sets off a scramble for power around the globe. But the optimistic case is that rising incomes will give other countries more of a stake in preserving the peace. Keep in mind, too, that the 1.6 percent annual improvement in living standards that Maddison forecasts for the U.S. is substantial compared with most of human history. At that rate, it would take only about two generations — 45 years — for U.S. living standards to double.

Techno-optimists argue that human ingenuity can solve any problem, including the pollution and resource depletion caused by the strong global growth they foresee. That's a bit strong. Sadly, throwing a lot of people and money at scientific problems hasn't always solved them. We still aren't driving fuel cell-powered vehicles or designing drugs effortlessly by computer.

Still, the acceleration in scientific research is a good thing. Says W. Michael Cox, the co-author of Myths of Rich and Poor: Why We're Better Off Than We Think and the director of the newly formed O'Neil Center for Global Markets & Freedom at Southern Methodist University: "We're at the very beginning of the use of genomics to create new drugs. People are inventing driverless cars. There will be spillovers from nanotech." Ninety-nine percent of the ideas in circulation today could flop, and you'd still have a fair number of winners. "The potential is absolutely there," says Princeton's Tenner. "I just have an idea or a hope that one or more of these is going to break loose."

Tenner's gut sense of optimism is familiar to scientists and entrepreneurs. In this Special Report, we're making the case for a no-nonsense brand of optimism. But truth be told, there's also something to be said for just going for it.

In the 1970s, Dr. Lawrence Brilliant worked in India on an international effort to eradicate smallpox, which killed 300 million to 500 million people in the 20th century alone, more than all the century's wars combined. The effort succeeded in 1979. "After that, how could you not be an optimist?" asks Brilliant. In April he became president of the new Skoll Urgent Threats Fund, a nonprofit started by philanthropist Jeffrey Skoll, the first president of eBay, to combat pandemics, climate change, nuclear proliferation, and other global problems. Brilliant argues that optimism must come from both the heart and the head: "Faith, science, and will. I draw on all of them."

The case for optimism is really a case for being open-minded—giving due weight to the possibility that things will get better than you think. Of course, no one really knows. But rational optimism, along with a pinch of Mary Pruitt-style enthusiasm, just might go a long way.