What Henry Ford understood

To put it mildly, Henry Ford was no socialist. He opposed Roosevelt and the New Deal and fought tooth and nail against an auto workers union.

But Ford understood something a lot of today's business (and political) leaders do not: It was in his own interest and in the public interest to pay his workers a decent amount of money. In fact, Ford paid about double what other companies had been paying for the same skills. Ford's own financial backers thought this was crazy, especially given the way Ford pinched pennies to cut costs on everything else. But what he did was carefully thought out.

First, he was convinced (rightly, as it turned out) that attracting the best workers would raise productivity. After all, what counts isn't cost per worker-hour, it's cost per dollar of sales. Second, if he paid his people enough, they'd be able to buy the cars they made, which meant more people seen driving Ford cars. Third, other manufacturers in the region would have to raise wages in order to compete with Ford for good workers, which meant that their employees would be able to buy Ford cars as well.

The same principle saw success on a larger scale in the middle decades of the 20th century, when rising wages and robust economic growth matched rising productivity. The general standard of living kept going up, and businesses made a bundle selling goods and services to a broad population increasingly able to afford them. In contrast, the concentration of wealth and income seen in the poorest Third World countries -- and in the U.S. in the late 1920s -- for obvious reasons tends to suppress demand and produce a lethargic economy.

Unfortunately, even while per-worker productivity in the U.S. has been increasing at a decent clip, wages have been relatively stagnant. Just a few years ago the U.S. Federal Reserve reported that a record low share of gross domestic product goes to wages and salaries at least since 1947, while corporate profits and pay for upper management have soared.

Robert Creamer has an interesting piece expanding on these points here. It's worth a read.

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