Slaying the Ford wage myth (again)
Hedrick Smith has become the latest in a long line of “esteemed” journalists (hey, he's a Pulitzer Prize winner) to fall for one of the most perpetuated myths in all of economics journalism.
That would be that Henry Ford drastically increased the wages of those toiling on his Ford Motor Co. production line in 1914 out of a sense of “social justice” designed to help those workers buy the Model T's they were making (which, the stretched yarn goes, bolstered Mr. Ford's bottom line to boot).
But it's a false narrative — Mr. Smith's came in a New York Times commentary on Labor Day — and one routinely employed by “progressives” to argue for wage increases, by government fiat or not, but seldom tied to productivity or supply and demand.
Indeed, Ford more than doubled the average wage of his employees to $5 a day (the increase being paid as a bonus for following strict lifestyle rules). But it wasn't out of any fealty to his workers, whose previous pay of $2.25 a day then was only slightly below the average; it was all about Ford's bottom line.
A few years ago, writing at Investors.com, respected economist Dwight R. Lee noted that “Despite being transparently silly, this belief continues to resurface as a justification for increasing purchasing power and employment with government policies that reduce production.”
Ford's turnover rate in 1913 was about 380 percent, Professor Lee recounted. To maintain the necessary workforce of 13,600, the company was churning through 52,000 workers annually. The absentee rate was 10 percent, another productivity killer. And of those who did show up for work, inexperience and work-shirking further damaged productivity.
A year after the wage hike, and after only carefully screened workers were hired — “Ford paid for dependability,” Lee reminds — turnover had fallen to 16 percent, productivity soared and the price of the Model T fell by 10 percent each year from 1914 to 1916. Ford's profits doubled, from $30 million to $60 million.
Now, “progressives” will say, “See, workers were paid more, they performed better and everybody benefited.” Yes, but there's a big difference with a major distinction.
Henry Ford “increased the general purchasing power by reducing the production cost, lowering the price and increasing the output of a product consumers wanted.” That is, “he increased purchasing power almost entirely by increasing supply, not increasing demand,” Lee explained.
But by the Great Depression, government's command economists had forgotten Ford's lesson, as they have today. As it did in the 1930s, Lee says government now believes “that increasing wages and prices (will) increase purchasing power by increasing incomes and, therefore, demand.”
Stated another way, purchasing power cannot be increased with policies that reduce supply by increasing production costs, Lee says.
Oh, and as to this notion that Ford paid his workers more so that they could buy Ford cars and add to his profits, English economics writer Tim Worstall calculates that the difference between the pay increase and profits from the maximum number of cars that he could have sold to workers would have resulted in a $2.6 million annual loss.
“Whatever Ford was, and he was many unpleasant things, he wasn't a financial idiot,” Mr. Worstall writes — “unlike those who continually retell this tale, which, as we can see, falls apart upon first examination.”
Colin McNickle is Trib Total Media's director of editorial pages (412-320-7836 or email@example.com).