They speculate, for example, that a major innovation or a change in the price of a key input can adversely affect some firms, causing them to reduce production and discharge workers, while other firms are helped and seek additional workers. The recessions that followed the dramatic increases in the price of oil in 1973 and 1979 were due, at least in part, to such changes. Businesses for which demand was sensitive to energy prices, such as full-sized cars, suffered a sharp decrease in orders and were especially likely to contract. It took time for displaced workers and other resources to be reemployed elsewhere. In the meantime, the economy experienced a recession.
Most recessions involve a tangle of forces.
The 1970s' oil shocks also set off an economy-wide decline in demand as real income was reduced by the higher cost of oil imports and tighter monetary policy dampened the inflationary pressures which followed the price increases. These factors slowed overall demand, and so were also partly to blame for the subsequent recessions. And, such a drop in demand may cause further job destruction. Yet, paying attention to forces that can produce reallocation may help us spot the seeds of future slowdowns and bursts of growth. The Asian economic crisis is having a disproportionate impact on firms that export to Asia or compete with Asian imports and might trigger a reallocation away from these sectors.