Henry Ford: Madman, Socialist, or Smart Capitalist?
On January 5, 1914, Henry Ford announced that he was paying workers on his famously productive Model T assembly line in Highland Park, Michigan, $5 per eight-hour day. Â That was almost three times what the typical factory employee earned at the time. Â In light of this audacious move, some lauded Ford as a friend of the American worker; others called him a madman or a socialist, or both. Â The Wall Street Journal termed his action “an economic crime.” Â Ford thought it a cunning business move, and history proved him right.The higher wage turned Ford’s autoworkers into customers who eventually could afford to plunk down $575 for a Model T. Â Their purchases in effect returned some of those $5 paychecks to Ford, and helped finance even higher productivity in the future. Â Ford was neither a madman nor a socialist, but a smart capitalist whose profits more than doubled from $25 million in 1914 to $57 million two years later.
Ford understood the basic economic bargain that lay at the heart of a modern, highly productive society. Â Workers are also consumers. Â Their earnings are continuously recycled to buy the goods and services other workers produce. Â But if earnings are inadequate and this basic bargain is broken, an economy produces more goods and services than its people are capable of purchasing. Â This can lead to the vicious cycle Marriner Eccles witnessed after the Great Crash of 1929 and that the United State began to experience in 2008. Â (Global trade complicates this bargain but doesn’t negate it, as I will discuss later.)
Ok, the quote above is from Chapter 3 (page 28) of Robert Riech’s new book Aftershock.  Let me ask you.  Was Ford a socialist, madman, or smart capitalist?  The title of this chapter is “The Basic Bargain.”  What do you think of Reich’s definition of what happens when the bargain is broken?  Was Henry’s lavish spending on workers a contributing factor to the Depression?
[poll id=”2″]
Mormon Heretic 
Why stop at $5/ hour? If that’s good, why not go to $1 million an hour? Wouldn’t that be so much the better?
It was $5/day, not $5/hour.
And obviously, paying $1 million/hour (or day) to every factory worker isn’t possible. $5/day was. And I imagine it did great things for attracting good workers and keep morale high.
Because if you pay someone $1 million per hour, she will have the capital to go out and start up her own business to compete with you; besides, you will waste away your own capital.
On the other hand, paying a manufacturing employee enough to purchase the products they produce is indeed clever capitalism. It is a matter of balance.
I do not know of any banks that pay their tellers enough to qualify under their own credit policies for home loans, but most do get free checking, which expands the deposit base.
Roman, I decided to add a poll to the post. (It’s my first poll!) I’m not sure, but from your question, you seem to lean toward madman.
I think Ford was a smart capitalist. The thing is, HE made the choice, knowing his ability to pay a higher wage and still be able to make a profit. It wasn’t the government or a union mandating a higher wage that perhaps another employer might not have the ability to pay. I have no problem with an employer making those kinds of choices for his business. It isn’t socialism when you are the one distributing your wealth voluntarily by establishing competitive wages to your employees.
But what would’ve happened if wages went up similarly across the board? Demand for products would go up, leading to higher prices–basic economics. Then, would the situation across the board be any better?
So then you ask about the “basic bargain.” Yes, certainly workers are also consumers, but when you raise consumer purchasing power at the expense of capital return, then the result is lost jobs. So you end up raising the situation of some at the expense of others. It is the actual and anticipated return on capital, not consumer purchasing power, that creates additional capital investments, resulting in the creation of more production and more jobs. Henry Ford didn’t increase wages without expecting a return on his investment, otherwise he wouldn’t have done it.
And since in the other post, you asked for someone to justify the salary of Lee Scott, perhaps you would like to justify Ford making a $57 million per year profit off of the backs of his employees who were only making $5 a day? I mean, yeah, he was paying much more than any of his competitors, and certainly his employees were very happy, but surely he could’ve afforded to pay at least double or more. At what point do you consider an employee’s pay adequate when compared to what the employer makes? It’s a slippery slope.
Hey, what’s up with my comments going through moderation? That’s the second time in 2 days.
I haven’t read Reich’s book, but the issue in today’s more global economy is that those well paid factory workers are just as likely to take their checks and spend them all at Walmart on Chinese-produced goods. Of course Henry was also known for having folks follow workers home to make sure the money got home and not wasted away in a bar en route…
Well, I can’t say one way or another but I do know that he was anti semetic and was more in favor of the German way of doing things. This may have had an impact on how he envisioned global and political economies.
Tara, my blog has been getting slammed with SPAM comments over the past couple of months since I switched hosts. I don’t know why you’re getting moderated, but I’m trying to release as soon as I can. (I may need to close comments on old posts if I continue to get slammed, though I don’t want to.) Hopefully my SPAM filter gets smarter. I’m astonished at the amount of spam recently, and may switch hosts back to the original.
@Mormon Heretic
That’s fine. I just wasn’t sure what was going on. It usually only happens occasionally when I include more than 2 or 3 links, but today it happened even without any links.
I wasn’t sure if maybe you were censoring me. 😉
People should remember that the early part of the 20th century was different than today. For example, few people believe that there is a real chance of a popular socialist uprising in the United States today.
Only 20 years before in the Pullman company town, bad business resulted in George Pullman deciding to reduce wages and increasie hours while not reducing rents or utilities and other prices. This resulted in his “model employees” striking, a strike which was put down by federal troops. The courts forced Pullman to divest himself of his town, citing his “Un-American” behavior.
I’d say that Ford learned the lesson of George Pullman—if you treat workers bad enough, they’ll ruin your life. I’ve seen too many companies that treat workers poorly during economic downturns. When the economy improves a bit, suddenly all the workers seem to get better jobs and leave, taking their accumulated knowledge with them. Unions have historically been a big part of that.
Tara, if you want to get censored, I’m sure R Gary will oblige. I will admit to being a bit exasperated with your political views, but I’ll warn you before censoring you, unlike others I know.
There’s a stark difference between Henry Ford and Lee Scott. Ford set wages 3 times greater than average. Scott has been forcing wages lower and lower. Ford showed that if you give workers money, they will buy the product you make. Scott thinks that lowering labor costs makes his company more profitable. Both are right, but Scott is hurting the American worker, while Ford was helping.
When I worked at Walmart, I was absolutely astonished at the poor health benefits, especially for a company so large. When I noted the problem, the personnel manager said that the health benefits were poor because of the size of the company. Say what? The government is much bigger and has better health benefits. When I worked at one of Mitt Romney’s companies 1000 times smaller than Walmart, Mitt’s company offered better health benefits. My wife’s airline offers great health benefits. Walmart bullies suppliers all the time to get lower prices, and has forced some suppliers into bankruptcy, and they can’t do the same with health insurance? Come on.
I plan a future post on Walmart’s unfair labor practices. They are cost-shifting the health insurance on to the taxpayer. They count on Medicare and Medicaid to offer their employees health insurance because they won’t (1) pay a decent wage to employee, (2) make health insurance too expensive for even the managers to afford. Lee’s salary is unjustifiable. I also believe Lee’s business practices are anti-competitive, and bad for the economy.
@Mormon Heretic
How is Scott hurting the American worker? He gave people employment that they otherwise might not have. And how is he forcing wages lower? They can’t go lower than the minimum wage, and there are many other stores that pay minimum wage as well. Is he trying to reduce the minimum wage? No, actually he has called for an increase in the minimum wage.
And that is where I have a problem with Lee Scott. Not because he pays a minimum wage, but because he has advocated an increase in the minimum wage. You might think that he was trying to do a good thing for Americans by advocating a higher minimum wage. But I think he did it to hurt his competition
(In case you didn’t know, Lee Scott isn’t the CEO of Wal-Mart anymore. It’s Michael Duke now.)
You have a problem with the benefits offered by Wal-Mart, but how many of Wal-Mart’s competitors offer health benefits, or even better benefits than Wal-Mart? You say you worked at one of Mitt Romney’s companies that offered better health benefits, but was it a company that employed un-skilled, entry-level positions similar to Wal-Mart?
If Wal-Mart is cost-shifting the health insurance on to the taxpayer, then so is every other business who hires part-time minimum wage employees. Why do you choose to demonize Wal-Mart when there are so many other businesses who do the very same thing? They are doing nothing wrong or illegal. Insurance and other benefits are a huge expense to an employer and if every business gave their entry-level employees health benefits, then that cost is going to hugely affect the cost of their products/services. That will get passed on to the consumer and it’s just going to hurt everyone. Average consumers won’t be able to afford to buy as much and those companies will be forced to make cuts. And that will have a huge ripple effect throughout the economy.
And even if Lee only made a fraction of what he made and the rest was paid to Wal-Mart employees, it would make little difference. Suppose he only made 1 million a year. Considering that Wal-Mart employees 1.5 million people worldwide, that would equal just a little over $15 per employee per year.
Oh, and then compare just the 24 million that Henry Ford made. Henry Ford employed approximately 13,000 employees in 1914. If Ford only made 1 million and gave the rest to his employees, it would’ve been equal to around $1800 per employee. Just something to think about.
Tara, there are lots of businesses that are unethical. Walmart is just one of them.
@MH
So the minimum wage is unethical?
Tara, I really don’t want to debate you anymore. You win.
@Mormon Heretic
Why? What did I do wrong? I don’t think I’ve been rude or disrespectful. All I’ve done is express an opinion that is different than yours. Others here have done the same. So why am I the only one you don’t want to debate anymore?
tara, I will send you an email this weekend explaining things.
@Mormon Heretic
Well now you’ve got me worried if you’ve got me worried.
I’m not sure what happened, but I didn’t mean to repeat myself in my last comment.
My daughter works at A&F at the mall. The biggest customers of mall stores are all the mall employees. I think my daughter is bringing home some money, but she has lots of clothes, that’s for sure. It is not a bad situation if all parties benefit from it. If you don’t like it, find a better job. If the business doesn’t take care of employees, they’ll lost their best ones. The market will dictate.
I believe Walmart is corrupt, in fact I’m pretty certain they are. That said, Tara brings up valid points about unskilled labor vs skilled labor. I also know that Walmart can certainly offer better healthcare to its fulltime employees. (I’m assuming MH was full time if he had healthcare). There is no such thing as too big to have lower cost. That statement was ridiculous. In fact I have to think that MH’s manager was simply lying or too stupid to know better. I can’t believe Walmart would make such an outlandish statement.
Regarding Ford, he was absolutely a smart capitalist. I would not say his strategy works across the board though. He produced a consumer product. That strategy would not work for businesses that produce Enterprise products and services. There is a huge difference between B2C and B2B. Plus I have read about Ford, and it seems to me that his primary goal was to treat his employees better to attract the best workers, and if they happened to purchase a vehicle in the process, that was secondary.
I think Tara is right in that a low-paid unskilled labor class is a necessity for maintaining cheap products. Capitalism wouldn’t function without that inequality being perpetuated. Capitalism relies heavily on the cheap labor of people in Communist and under-developed countries. It also relies upon the perpetuation of an underpriviledged, under-educated (unhappy) lower class, in order to keep itself functioning.
We may not think of ourselves as being rich people who are taking advantage of the poor, but that is what we are if we buy cheap goods that someone else has laboured to produce, without fair recompense. Basically, every Western consumer is a rich person who is growing fat on wealth stolen from the poor.
The only way I can think of to avoid being a slavemaster is to produce as much of my own consummables as possible, through self-reliance measures, and use the excess money in the budget to assist those who do not yet have what they need to perpetuate self-reliance. Consume goods in moderation, rather than excess, that way we can afford to pay a good price for the goods, and the one who made the goods can be justly recompensed for their efforts.
Walmart and other companies (even Ford back in their day) are simply products of our society – nothing more, nothing less.
Ford paid a higher wage NOT ONLY because he wanted his employees to be able to afford his product, but also because he realized that training workers costs money, replacing workers cost money, and training the new ones cost money. He set out to SAVE MONEY by paying them enough to KEEP those workers. This was and still is a sounds business practice. Consider also that Ford’s Assembly line workers were fairly skilled for their time.
Walmart sells cheaply-made, imported products to people who WANT TO BUY cheap products cheaply. It would add too much to the cost to pay folks who put $14 toasters on shelves more than minimum wage. People shop at Walmart because it’s CHEAP.
People DON’T WANT to pay top-dollar for goods. They will shop around and find them as cheaply as they can.
Nobody is forced at gunpoint to work for Walmart. They have the freedom to work elsewhere.
Likewise, nobody is forced to shop at Walmart.
Stop complaining about Walmart. Work there – or don’t. Shop there – or don’t.
If you can afford better stuff than is sold at Walmart – I’m happy for you – go do it.
If you want to make more than Walmart employees – then you need better skills. If you have them, go to work for a “better” company. if you don’t have skills – learn them – or – be happy that Walmart will hire you at all.
>>>But if earnings are inadequate and this basic bargain is broken, an economy produces more goods and services than its people are capable of purchasing. This can lead to the vicious cycle Marriner Eccles witnessed after the Great Crash of 1929 and that the United State began to experience in 2008. (Global trade complicates this bargain but doesn’t negate it, as I will discuss later.)<<<
Uh, I'm not buying into the question.
I'll agree that in 1929 there were more goods and services being produced than people could afford to buy. But the deal in 2008 seems to be that people (at least USofAliens) were able to buy more goods and services than they could produce thus creating the two headed monster of a both national and trade deficit.
Henry Ford was a stone cold capitalist.
I think that Henry Ford is a capitalist