In 1914, Henry Ford shocked the business world. He announced that his factory workers would be paid $5 a day — double the going rate. To most employers, this was lunacy. Wages were seen as a cost to be minimised. Ford’s logic was different. If workers couldn’t afford the cars they made, there would never be a mass market for automobiles. By raising wages, he wasn’t giving charity; he was creating customers. He was also, admittedly, seeking to reduce union power.
That single decision did, however, become folklore in economic history, but not because Ford was a benevolent capitalist. He was hard-headed. He understood a paradox that capitalism itself tries to ignore: labour is both a cost in the production ledger and the foundation of demand in the wider economy. Ignore the second role, and you collapse the market you depend upon. This duality cannot be avoided, and yet most businesses, economists and politicians try to do so.
This, then, leads to the Henry Ford Question, which is: How can prosperity be sustained if labour is treated only as a cost to be cut, rather than as the source of the demand that keeps the economy alive?
Sigh.
At the time, workers could count on about $2.25 per day, for which they worked nine-hour shifts. It was pretty good money in those days, but the toll was too much for many to bear. Ford’s turnover rate was very high. In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000. New workers required a costly break-in period, making matters worse for the company. Also, some men simply walked away from the line to quit and look for a job elsewhere. Then the line stopped and production of cars halted. The increased cost and delayed production kept Ford from selling his cars at the low price he wanted. Drastic measures were necessary if he was to keep up this production.
Ford’s $5 a day was efficiency wages. The fall in search, recruitment and training costs was larger than the increase in pay costs.
Also, that rise in pay was greater than the total trevenue – total revenue, not profit – to be gained by each and every one of Ford’s workers buying a new Model T each year.
But then expecting Spud to know anything, eh?
Model Ts were cheap, because then it was easier to replace one after running over some Jews. They were all black, so that it was less conspicuous when hitting an Orthodox one.
Henry Ford was quite thorough I his thinking on this matter.
And the Ford Edsel was the Jeremy Corbyn of cars.
Aye, and a factory that makes bicycles must pay a man enough to buy a bicycle.
Some yarns are so stupid that boys in short trousers can see through them. But not the green potato.
Not to mention the wage increase that would be needed at the Sunseeker Yacht company.
Or Boeing 🙂
$5 a day from $2.25. An increase of c$900 a year. The most popular Model T cost $360 at the time. Maybe workers did by one. But Ford’s profits weren’t increased by the deal.
“Employers pay what they have to pay to attract and retain workers who can do what they want done.”
Ford wasn’t paying enough to retain them. So he HAD TO pay more. The rest is intrigue. Commie dick Murphy is just pushing the de rigueur Marxist fallacy of the primacy of labor.
Uhh . . . then they are avoiding it. Does he read what he writes?
The pay increase was not a flat out daily increase, but a form of deferred compensation to be paid after the employee had remained at Ford for some period. As noted, Ford’s goal was to reduce turnover, so the increase was a form of golden handcuff. As the workforce was substantially made up of immigrants there were also some lifestyle caveats that the employee had to demonstrate toward becoming more American.
Mr Worstall has pointed this out before, but it is illogical to think that if you want to sell more you need to pay the workers enough to buy your products. For an absurd example, apply this logic to Boeing.
There’s a man down the street from me who takes his Model T out for a spin every now and then. When I was in school back in the ‘60s I remember an old lady who still had her Model A that she’d purchased new and just kept going. At the time the car was only about 35 years old.
In “One Summer”, Bill Bryson has an interesting chapter on Ford. The pay increases were an attempt to halt massive staff turnover – 370% in 1913. He also policed what his employees did when not at work – diet, hygiene, religion, hobbies and recreational habits. I’d want a lot of money if my boss told me what I could or couldn’t do in my spare time
My most cited piece on Google Scholar (30! 30!!!) is a piece I did at Forbes on exactly this. Efficiency wages to reduce turnover and training costs.
I even did the calculation about selling cars to his workers. If every worker at the plant bought a new car every year the revenue – revenue! – would be less than the increased wage bill. So, that really wasn’t the reason.
Did you also cover the lifestyle policing he introduced?
Of course he doesn’t read; that would imply that there was something he didn’t know.
It is of course the concept of standing in a bucket & lifting yourself by the handle. Also known as MMT.
And perhaps as the late Dr Walter Williams put it,
“Taking a bucket of water out of the deep end of the pool, and pouring it into the shallow end.”
Wut? Our employees were treated only as a cost to be cut (well, not only, but okay for his discussion). The economy was kept going by all in the marketplace, incidental to their employment. My brain can’t connect production and consumption in the same body of people.
K. I know how he does it: a government economy, his beloved communism.
So the lesson is, Ford was an “investor in people”. I’m sadly old enough when British businesses used to at least pretend to do the same, hence the dusty little plaques. Your people are your business, but the FTSE 100 is full of accountant-led firms who dream of paying nothing for labour. The current AI share price bubble is fueled by increasingly delusional hope that chatbots will scale to being able to replace those stinky, stupid, obstreperous employees.
Zuck is promising to build a 5 GW data centre the size of Manhattan (!) But the question of getting customers to pay actual money for AI on a regular, sustainable basis you can build a business case around seems a secondary concern. And there’s no good technical reason to think throwing gigawatt hours of compute at LLMs – the current Big Bet for AI – will make them fundamentally smarterer and less likely to invent crazy made up “facts” when you don’t want them to. It’s ELIZA 2.0, not the bloody Computer Messiah. But tell that to Larry Ellison’s five richest accountants and the people currently using ChatGPT to fuel their mental health excursions.
The money is in subscriptions, I am told. I don’t see how that can work, but I can’t refute it.
Long before Henry Ford was even a gleam in his Dads eye, people like Titus Salt , the Fry family and Cadbury were building model villages for their workers. All a cost to be taken into account in the price of their products.