Sunday, May 31, 2015

The Imaginary Economics of Henry Ford | National Review Online

The Imaginary Economics of Henry Ford | National Review Online

The best defense against our new robot economic overlords, the hosts insisted, is a guaranteed minimum income. For this, the wisdom of Henry Ford was cited, the familiar claim that Henry Ford paid higher wages so that his workers could afford to buy his cars, thus expanding his business.

Never mind that this sort of bootless bootstrapping is economically and logically illiterate—there is scant evidence that Ford ever made any such claim, and he certainly never actually did any such thing, as has been documented many times. Andrew Leonard, writing an article about the same book in the Los Angeles Times, makes the same claim: “Henry Ford understood this when he paid his workers high enough wages to buy his cars. Today’s titans of the economy appear to have forgotten the lesson.”

The lesson has not been forgotten, because it was never learned—because it is not a lesson. Ford didn’t exactly double the wages of his workers, but he did institute a bonus program that effectively doubled the salary for workers who satisfied the conditions, which were invasive and paternalistic: They were expected to submit to inspections to ensure that they did not drink or gamble, that their wives did not work outside the home, that they were properly Americanizing themselves if they were immigrants, etc. Ford had a turnover problem—it was a tough place to work—and excessive turnover lowers productivity and profits, in no small part because of the need to train new hires.

Ford emphatically did not do this to empower workers to buy Ford cars—indeed, if he had attempted to do so, it would have represented a disastrous miscalculation: The additional wages represented more than $9 million a year in expenditures for Ford’s 14,000 workers; if every one of those workers had bought a new Ford every single year, that would have represented less than $8 million in gross income and a great deal less than that in profit, as Tim Worstall calculates. That would have been a loss-making strategy, but even if it were profitable, it would not have been very profitable: Ford was selling hundreds of thousands of cars a year by that point, and its work force, which had about as many people as modern-day Baraboo, Wis., hardly represented much of a growth market.
But of course Henry Ford was not that stupid. He knew that the key to making a car for “the great multitude” was not paying his workers more but keeping prices low, as his actual quote (from My Life and Work) makes clear: “It will be so low in price that no man making a good salary will be unable to own one—and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.”

The self-financing pay hike represents an especially illiterate and annoying species of magical thinking. The only way to make a society wealthier is to make it wealthier, i.e. to produce more goods and services. Even assuming that government (or the Ford Motor Company) can stimulate demand in an effective and predictable way, demand does not magic automobiles into existence. Nor does it magic cantaloupes, sofa sectionals, skateboards, or self-contained wind-powered camping capsules into existence. Demand won’t clean a house, rebuild a transmission, mow the grass, or pick the cotton.

The claim that Ford raised workers’ wages in order to sell them more cars is untrue, or at least without any supporting evidence, and the radio guys, Andrew Leonard, the Los Angeles Times, et al., should stop repeating that falsehood. And, if they can manage the mental firepower, they should think about why it is a deeply ignorant claim in the first place.

No comments: