When will the CBI learn Henry Ford’s lesson that paying people enough so that they can afford to buy the products business wants to sell is the most basic pre-condition of success?
Sigh.
So it wasn’t $5 a day and it was done actually to reduce total labour costs by reducing labour turnover. And as a final nail in the coffin of the argument that it was done so that the workers could afford the cars, there’s this.
Car production in the year before the pay rise was 170,000, in the year of it 202,000. As we can see above the total labour establishment was only 14,000 anyway. Even if all of his workers bought a car every year it wasn’t going to make any but a marginal difference to the sales of the firm.
We can go further too. As we’ve seen the rise in the daily wage was from $2.25 to $5 (including the bonuses etc). Say 240 working days in the year and 14,000 workers and we get a rise in the pay bill of $9 1/4 million over the year. A Model T cost between $550 and $450 (depends on which year we’re talking about). 14,000 cars sold at that price gives us $7 3/4 million to $6 1/4 million in income to the company.
It should be obvious that paying the workforce an extra $9 million so that they can then buy $7 million’s worth of company production just isn’t a way to increase your profits. It’s a great way to increase your losses though.
A company cannot increase its profits by paying its workforce more so that they then buy the company’s products. That is known as trying to lift yourself up by your bootlaces.
Man’s a useful addition to the Professoriate, eh?
Has he considered what happens when companies pay their staff more and they then go out and buy their competitors’ products?
“When will the CBI learn Henry Ford’s lesson that paying people enough so that they can afford to buy the products business wants to sell is the most basic pre-condition of success?”
Did he even take a moment to think “oh, wait a minute, Lamborghini and Chateau Latour do”? What a dick.
Rrrrrrrrrreally hope that City have hired him purely as a marketing wheeze. ‘previous lectures include that guy advising Corbyn when all that crazy shit went down’ etc.
Funny, isn’t it? There’s supposed to be the toffs, the ex-public schoolboys, the old boy network, all despised by the left.
But what’s this? Someone who knows nothing about economics, little about tax and thinks that everyday accounting deals with imaginary assets gets a professorship?
Nothing to do with being a lefty then…
If it worked for Ford, presumably it could work for Boeing?
I first heard that Henry Ford bunkum when I was a lad (maybe fourteen?). It was obvious immediately that it was rubbish, otherwise you’d pay matchmakers enough so that they could afford to buy a match.
The Ford pay rise did snuff out attempts to recruit workers to a trade union.
“paying people enough so that they can afford to buy the products business wants to sell is the most basic pre-condition of success?”
Utter tosh from Murphy. What about luxury goods? The armaments industry?
Just hope at least some of his soon to be students see through him.
Reminds me of an old Punch (I think) cartoon, with the Boeing board meeting discussing China:
“1 billion people! If just 1% of them buy one of our ‘planes…”
Like dearieme, I can remember encountering the Henry Ford/wages thing. But it was used in the context that an economy expands because the wages people earn for making things goes back into the economy when they buy things. A simple explanation of how a modern economy works. Not a business model.
That was in about the second lesson in the O-level economics course.
Given Richie reckoned he gave up uni economics because he couldn’t understand it, maybe that was the last lecture he attended. The one that baffled him.Could explain a lot.
Oh, come on, Tim. You’re being incredibly churlish about Richie’s elevation to such an august institution. We should all be very happy for him that he will profess alongside such lustrious scholars as Connie St Louis.
If your product is really really cheap, can you pay the workers peanuts then?
The stupidity of the man burns. If every worker had to earn enough to be able to buy the product he’s making, bang goes just about every large piece of heavy engineering that makes the world go round.
What does Murphy create, and what would be a fair price for it?* Then we can work out how much he needs paying.
* every now and again when Oi were a nipper you used to see a sign outside a farm or smallholding: “Free manure (bring your own bucket)”
Jim
I would certainly go and work for JCB if the wage would enable me to buy some earth-moving equipment!
I realised it was tosh when I worked out (fairly quickly) that BAe would have to pay its workers enough to buy a fighter jet, and some firm somewhere would have to pay its workers enough to buy a nuke. Which would all be good, clean fun, but clearly economically unviable. Not to mention the security problems it would generate.
Odd thing is, every econ textbook I’ve seen the claim in has actually got it right (efficiency wages).
I think it’s the history textbooks which mangled it into the “he paid them so much they could afford to buy his cars” form.
The *best* you can say about this sort of ‘scheme’ is that *if* the employer can fix the wages juuuuuust right *and* each employee chooses to buy your product (because each one the doesn’t gets the extra pay without returning it to the company), the employer ends up in *exactly* the same position as he started from and the employee has the product.
If you fix the wages too low – then the employee can’t afford your product, fix them too high and you lose money on the employees purchase.
And its a lot of work to gather the data to hit that target – which imposes extra costs that now have to be factored in.
You would, literally, be better off just *giving* your product to your employees for every ‘X’ amount of hours of production they perform – removing most of the calculation costs and avoiding the ‘free-rider’ problem.
Which might be great if you’re selling cars, not so much if you make toothpicks.
Anyone remember the scenes of Russian workers in 1990s post soviet dissolution economic crisis waving around glass vases to sell as they were paid in produce?
So Clara Bryant (who may know a bit about Henry Ford) points out how bollocks this claim is. Ritchie’s response?
“It’s a useful metaphor even if he did not say it”.
Facts just don’t matter to the man.
This exchange is good as well:
“Neil Wilson says:
September 9 2015 at 6:24 pm
I have to ask why all those companies who are saying “we will put prices up” do not immediately become the subject of a competition investigation.
Richard Murphy says:
September 9 2015 at 9:55 pm
Precisely
How can they do that, it has to be asked!”
And Ritchie is going to be teaching people?
I’ve wondered for years why my employer does not pay me enough to purchase my own very MRI machine. It’s not right, I tellya!
“GlenDorran
So Clara Bryant (who may know a bit about Henry Ford) points out how bollocks this claim is. Ritchie’s response?
“It’s a useful metaphor even if he did not say it”. ”
It’s not even a Metaphor. What’s the metaphorical aspect?
At best it’s apocryphal. And how can it be useful when it blatantly wasn’t true in the Ford case and can easily be shown to be nonsense.
It’s useful to Murphy in the sense that it says to economically illiterate left-wingers what they want to hear, I suppose.