Henry Ford: the chicken or the egg? Many situations are described as being "the chicken or the egg?", meaning that two things go together in such a way that you can't tell which came first, or which is the cause and which the effect. As in "which came first, the chicken or the egg?" A common example of this is wages and productivity: they are always correlated. Countries with high productivity also have high wages. And conversely, low wages and low productivity. These are also expressed as demand and supply: wages provide the demand; productivity provides the supply. Which comes first? Which is more important? To philosophers of the Middle Ages this sort of question might have provided endless debate. But today, with the insights of science and economics, these seemingly endless circles can be resolved. On the original "chicken and egg" it is clear from paleontology that there were eggs millions of years before there were chickens (or any other species of birds). And from biosociology, E.O. Wilson, Richard Dawkins, and others have demonstrated that eggs also come first in the order of importance. That is, from that perspective, a chicken is just the tool that an egg uses to make another egg: the genes are what is important. On the "productivity or wages" question, there is a statement often attributed to Henry Ford, that he raised the wages he paid to his workers so that they "would earn enough to be able to buy his cars", and that this concept was the key to his success. Or as Hummel put it: Of course not. It's a chicken and egg situation as I explained above. "...... that is the central point of my original article. Henry Ford himself understood that everyone, including the capitalist, benefits when labor is paid a decent wage. He saw that effective demand is the key. You can't get rich selling your product to just the well-to-do. You need a mass market of buyers who earn enough income to afford more than the bare necessities."--William F. Hummel The HISTORY According to Grinch Ford understood that it takes more than just paying a decent wage, though; he was one of the few capitalists who understood that, if you're losing money on every unit you sell, you can make it up on volume. Because he was losing money on every $850 Model T he sold, he listened to his economists, and raised the price to $950. Result: profitable, but a market-share-loser (to Buick and Oldsmobile). Economists' analysis of the automobile market at the time said the industry seemed to be settling in on the "natural price" for an automobile. Henry Ford's response to this expert analysis: in 1910, he told his economists to shut up, and cut the price from $950 to $780; i.e., to a price *below* the money-losing level of a few years before. Result: a 60 percent surge in sales that rocketed the Model T's market share way ahead of Buick's. Unit costs dropped with the massive volume increase, and the $780 car was profitable. In 1913 he established the auto industry's first functioning assembly line at Highland Park, Michigan, attaining radical productivity improvement. This enabled him in the following year, 1914, to raise the minimum daily wage from $2.34 to $5. He learned his lesson well. By 1916, he had cut the price to $360, and still made huge profits. So it's an oversimplification, if not a cart-before-horse assertion, to imply that a "decent wage" is the solution to the growth problem.---Grinch SUPPLY SIDE HENRY Steve Conover, Sr.: Friends in sci.econ: A false premise has been generating much discussion recently: that Henry Ford's doubling of his workers' wages is a good example of the good that demand-side stimulus (i.e., raising wages) can do for the economy. It is a grossly misleading premise, if not downright false. Let's get the historical record straight. In 1911 (1912?), Henry Ford ignored his economists' advice, and reduced the price of his Model T to a level BELOW COST. IOW, he increased the supply of more-affordable cars to the public. He reduced the price to increase volume, anticipating the volume-driven, learning-curve cost efficiencies that would make each unit profitable, make Ford the low-cost producer, set a new cost-structure paradigm for the automobile industry, and change the industry from job-shop specialty manufacturing (the product of which was affordable only by the rich) into mass production (within reach of a far larger customer base). If Henry Ford's supply-side hypothesis and experiment had failed, Henry Ford would be an obscure asterisk in the history books. Moreover, Ford's supply-side strategy, BTW, is how the Japanese firms overwhelmed the American firms in the same industry in the '70s and '80s, and how Soichiro Honda overwhelmed his competitors (who were, according to some theories, supposed to be the invulnerable oligopoly). Henry Ford doubled his workers' wages in *1914* -- three years AFTER implementing his supply side measures. If Ford's sales, production volume, and productivity had not skyrocketed in those three intervening years, he would have been BANKRUPT (...i.e., unable to afford paying ANY wages, let alone doubling them commensurate with productivity of his workforce). Henry Ford was a supply-sider. Please, let's stop using him as an example of the "wonders" of Keynesian demand-side stimulus. --Steve Hi, In this whole "Henry Ford" thing, I think the main point is being missed. The key contribution of Ford was not "paying workers enough to buy the cars they make", it was introducing the assembly line. This greatly raised worker productivity/efficiency, and this greatly reduced the production costs per car. It was the productivity gains that made the wage increase and cost reductions possible, and thus made the wide spread ownership of cars possible. If the Ford plant had make cars individually by "skilled craftsmen", with 3 or 4 times the labor input into each car, even Henry Ford could not have afforded to "pay his workers enough to buy his cars". Or only a few highly skilled craftsmen would be able to afford them. But Ford had set out to "build a motorcar for the great multitude". So why did he raise the pay of his workers to what was then considered to be an very high level? Well because of the greater productivity he COULD, but also he needed to keep his workers. The production efficiency came with a price. Ford was employing the time-work-motion management theories of Frederick Winslow Turner and Frank B. Gilbreth. They got maximum production by efficient but dull and repetitive motions by the workers. Ford needed to pay more to compensate for the loss of job satisfaction that came with assembly lines. It is possible that Henry Ford himself did not understand all this; he had some strange ideas about politics and economics. -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 AND: kenfran@arkansas.net wrote: >> The auto industry is in fact a great example. Henry Ford >> doubled the wages of his workers, and lowered production costs at the >> same time. .... Grinch: Hooey. He did NOT "double the wages of his workers and lower production costs at the same time". This one of the great urban legends of psuedo-economics. Some people just love believing it, even though the factual history is very easy to verify. >jim blair: >But first he introduced the assembly line. This greatly increased >productivity, which made the high wages possible. Grinch: Yes, FIRST he introduced the assembly line, at his plant in Highland Park, Michigan, in 1913. This slashed the amount of time needed to build a Model T from 12 1/2 hours to 1 1/2hours -- boosting productivity over 700% NEXT he cut prices, from $850 for a Model T eventually down to $290 -- while engorging his profit margin. This slashing of prices created one of the biggest sales booms for one company's product ever seen in U.S. history. Ford's sales *exploded* -- from being one of 400+ plus car companiees in the US to having over 50% of the market. THEN, guess what Henry had to do to meet sales demand? Yup, hire many more workers! How to do that? You can't multiply your work force paying the same old wage rate. You've got to raise wages. Business 101. So a year AFTER getting the assembly line running and seeing his sales explode, Ford raised his wage rate from $2.34 to $5.00 That's a 114% raise in wages following an on over 700% increase in productivity. (Wow. Surely enough to mark Henry as a revolutionarily generous guy to labor). Henry then used the $5 wage as a competitive *weapon* against his non-assembly lined competitors. Because he could *profitably* pay much more than they could due to his higher productivity, he stole all their best workers. He could also *fire all his own workers* who weren't as good as the best he could hire at $5 . Which he *did* -- lest anyone think Henry put in the $5 wage for the benefit of his workers. Henry created Ford's infamous "Sociological Department" that culled through the lives of Ford's workers. Not just their work records -- efficiency, attendance, attitude towards unions, etc. -- but *everything*, religion, family, personal behavior, the works. Ford didn't give $5 a day to just anyone. Only to workers who put profits in *his* pocket at the $5/day rate. His own prior workers worth only $2.34 were the first to go. Along with those whose personal lives he didn't approve of. Henry Ford was the worst union-busting, labor-exploiting SOB of his generation in the whole auto industry. But he was also a salesman who knew the value of PR full well. So -- while he was setting up his Sociological Department to cull from his company's ranks those all exhibiting 'disapproved' personal or political behavior, as well as the less productive -- he started a big PR campaign feeding the ignorant masses the story of how he voluntarily set up the $5 wage just because he was a nice guy who wanted to have happy workers who made enough money to buy Ford cars themselves. And it was a great success! People who knew nothing about Ford felt good about buying Ford cars. Workers at other companies who knew nothing about Ford felt good about jumping to him for a $5 job. Ford become a national hero, for a while. And an urban legend was born. The delicious irony about this particular urban legend is that the ones who constantly repeat it are those, like kenfran, who fancy themselves as the friends and defenders of labor! They've swallowed that labor-busting old SOB's propaganda routine hook, line and sinker! Now, kenfran has claimed in this thread that he is a former member of the UAW. Of course, he's claimed to be lots of things in different threads. Maybe they are all true, I don't know. But if he claims that it was from his time in the UAW that he gained his view of Henry Ford as a such voluntarily-boost-the-wage progressive labor-relations guy, then he wasn't a member of the same UAW that I was. My UAW remembers Henry Ford this way: http://www.uaw.org/History/ford.html BTW, Ford's obsession with destroying unions and greed in exploiting workers quickly backfired on him. He later lost his near monopoly in autos almost as rapidly as he'd gained it, in good part because GM adopted a less stupidly hostile attitude towards labor that gave it a competitive advantage versus Henry. It signed contracts with the UAW years before Henry did. Alfred Sloan was able to create much of modern management at GM while Henry was still obsessing with busting unions. Nevertheless, Ford *did* do great things for the working man. Not by raising wages, but by *lowering prices* in dramatic fashion, and showing others how to do the same, to give the working classes of the next generation formerly unimaginable buying power. >>jim blair: >>And his were non-union workers. Dosen't that blow a hole in your theory >>that unions and not productivity are the key to high wages? > >No, since my point was that higher wages are a key to productivity, >and the correlation between union membership and higher wages is >uncontestable. Grinch: Higher wages don't make workers more productive. Obviously -- or every industry and nation in the world could increase the productivity of its workers just by unilaterally paying them higher wages. We'd be in utopia in a day. Causation goes the other way. Greater productivity enables a firm to pay higher wages. The firm then can bid up the wage rate. Such a firm may then emerge with a higher paid, more productive work force. But perhaps *not* composed of the same workers it started with, as the true story of Ford very well demonstrates. More productive workers are attracted to it, less productive ones are displaced from it and move on. End of myth that higher wages increased the productivity of individuals who were there at the start. Higher productivity enables higher wages, which may *attract*, not create, more productive workers. If this occurs on a wide enough scale across the economy, there will be a widening of wage rates as the top of the scale moves up due to bidding for the limited numbers of the most productive workers. (Sound familiar?) Individuals generally then may get a signal that increasing their personal productivity is important, leading to an increased demand for education and training (Sound familiar?) Trying to force the reverse causal relationship by compelling above market wages for a static work force results only in lower profits for the industry as a whole, less investment, less employment, and the loss to the UAW of hundreds of thousands of members as non-union car makers paying *high* wages to *more productive* workers open and profit. On an even wider scale, it results in a steady decline in union membership over 40 years until it is in only single digits in the private sector: 9.5% and still falling. >>>...A higher-paid worker is more likely to stick with his job, >>> and won't risk losing it by missing days, etc. >>Which is probably why he doubled wages. Har de har har! ;-) >jim blair: > Working on a assembly line was >less rewarding emotionally for the workers than doing the work of >skilled craftsmen. He needed to pay them more to keep them. >Yes. Of course. But why doesn't McDonald's realize this? I just drove up the New England Thruway and stopped at a Friendly's for lunch. Big sign up:" Waiters/waitresses wanted. $10/hour, $15/hour with experience." And where did Ford get the capital for is company? Grinch: Ford's start-up was staked with more than a half-million dollars (inflation adjusted) plus a substantially larger line of credit from a consortium of investors known as the Malcomson group, Mr. Malcomson being a wealthy coal trader. If Henry had financed his company's capital needs from earnings retained from cars built by hand, his successors wouldn't be up to making the Model B yet. Ron Peterson wrote: >Grinch wrote: > >> OK. How did Henry build and sell 27 million model Ts, from which he >> retained the earnings he used to build the factories that built the >> Model Ts, before he had the factories that built the model Ts? > >From the Ford web site: >"Ford Motor Company entered the business world on June 16, 1903, when >Henry Ford and 11 business associates signed the company's articles of >incorporation. With $28,000 in cash, the pioneering industrialists gave >birth to what was to become one of the world's largest corporations. >....... >-- > Ron > Hi, Note that $28,000 in 1903 corresponds to $559,000 dollars in 2002 (ie over half a million in "constant dollars") if we use the CPI inflation)correction at: http://www.westegg.com/inflation/ So the question is: where did Henry Ford get over half a million dollars? From the sale of his cars to his "middle class" customers? Or were some of those 11 business associates "rich guys"?? AND: When Grinch said this was over a half million current dollars, I checked that with the CPI based inflation correction and confirmed his claim. But on reflection, I think this far understates the value of the capital in current terms, because it is trying to compare the purchasing of consumer goods. Better would be to ask what fraction of the 1903 GDP was $28,000? And how much money would correspond to that same fraction of the 2002 GDP? My guess is that it would be far more than $600,000, probably in the ten million dollar range. Why? Because the GDP has grown much faster than the inflation rate during the last 100 years. What was the US GDP in 1903? Go to: http://eh.net/hmit/gdp/ and I get $22.9 billion = 22.9 x 10^9 So Fords start up capital of $28 x 10^3 was about 8 x 10^-5 of the US GDP. The current GDP is $10,445 billion. So Ford's startup capital would correspomnd to over $8 million today if it were the same fraction of the GDP. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. For a good time call: http://www.geocities.com/capitolhill/4834