A great example of how the economy can adapt comes from the bar and pub industry. The graph below shows seasonally adjusted monthly sales in Canada between June 2000 and June 2010. A fairly steady upward trend over the first half of the decade was followed by a series of large swings over the second half. What caused this?

Starting in 2005, Canadian cities and provinces started introducing “no smoking” bylaws in bars. At the time, many bar owners were adamant that such regulations would drive them out of business. The logic was that if bar patrons couldn’t smoke in the bar, they’d stay home.

As the new rules were rolled out at various times across the country, there was indeed a sudden and painful drop in revenue. But it was quickly replaced by an almost equal increase in the following months. Smokers did stay away from the bars for a while, but they quickly adjusted to the new rules by stepping outside to smoke. At the same time, bars and pubs may have picked up customers who used to avoid them due to the secondhand smoke.

The bar and pub sales data highlight two things: the first is that our economy is often more flexible and adaptable than we think. After all, the no smoking bylaws did not cause the death of bars and pubs.

The second is that, while we can adapt, there are often consequences. Bar and pub sales did fall with revenue down more than 10 per cent by 2010 compared to the peak set in 2005.