The FT has a headline today that says:
Living wage will hit profits and jobs, warns new CBI head
It really is time these people have heard all this before. The world was going to collapse with the introduction of the minimum wage in 1999, remember?
It didn't. Employment grew.
When will the CBI learn Henry Ford's lesson that paying people enough so that they can afford to buy the products business wants to sell is the most basic pre-condition of success?
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Well said!
Reminiscent of the same hoary old chestnuts people of this ilk have been trotting out generation after generation. Like “all profit is made in the last hour” therefore it’s not possible under the “iron law of economics” to cut the working day from 12 hours to 11 hours because it would put everyone out of business; or asbestos, radium, tobacco, Coca Cola etc is not harmful to your health.
There was some numpty pushing this very line on Radio 4 yesterday morning who sounded like Chicken Lickey with his dire predictions of business closure armagedden and how it is economically impossible because the value of labour would exceed the value of what is produced.
It really is like listening to a bunch of selfish sociopathic kids in a playground.
I get this with non-doms, too.
Introduce remittance basis? “We’ll all leave”. Nobody leaves (well, OK, three men and a dog).
Increase remittance basis charge? “We’ll all leave”.
(Tories!) Introduce ATED? “We’ll all leave”.
(Tories) threaten further increase in remittance basis charge? “We’ll all leave”.
(Tories) introduce CGT for non-resident owners of property? “We’ll all leave”.
(Tories) introduce wide-ranging reform that will clip non-dom wings, full details still very much TBC? “We’ll all leave”.
Could I be the one that says “oh just FFS shut up and pay your dues, you’re not going to leave because the world finance industry is here, as are Kensington, Notting Hill, various posh shooting estates, private schools and all sorts of handy stability”?
It’s truly pathetic. Almost as pathetic as the apparently endless stream of government ministers who seem to believe this rubbish.
I’ve been hearing that since the 80s
And it’s never been true
What is wrong with Chelsea?? The area not the football club.
For the record, I had a son born in Chelsea and Westminster hospital
It was brilliant
And he now says he supports Chelsea as a result
Actually, he has no interest in football at all: clearly inherited his mother’s genes on that one
I am the same with football. Cant see the attraction, many do. Just not for me.
Try Rugby much more intellectual and labyrinthine in the structure of its Laws! The offside rules are more complex than anything economics comes up with..not to mention the ten meter law which would have befuddled Isaac Newton!
Rugby is his game
Some injuries have proved it
“..Henry Ford’s lesson that paying people enough so that they can afford to buy the products business..”
This hoary old myth has been repeatedly shown to be wrong by numerous people over the years.
Ford increased his wages in order to reduce staff turnover. The extra he paid in wages was saved through reduced training costs for new hires.
Of course this only works as long as the employer is able to pay more than the other employers could for the same staff.
Paying people more so that they can afford the employer’s products is nonsense.
Please don’t continue to promote this myth; it does your cause and credibility no favours.
It’s a useful metaphor even if he did not say it
Not really. It is economical nonsense.
I know people who work on building luxury cruise ships. I know people who design paper mills. I know architects and engineers who design schools. Should their pay be high enough to buy one of the products that they make? Obviously that is a silly idea.
As said in other comments, Ford paid better than others to reduce turnover of staff. This exactly what an increased minimum wage will NOT achieve.
Oh come on: let’s have a sensible debate
This is not an attempt at that
“Paying people more so that they can afford the employer’s products is nonsense.”
I beg to differ. Whether he used this quote or not, it stands up as common sense. More money distributed as wages, more products are bought as a result. Employers have tried to get around this basic truth for years. Jobs were outsourced to lower wage countries, unions were weakened and, particularly in the early 2000’s, lowered interest rates and greatly increased consumer borrowing. Why pay your staff an adequate wage when they can go into massive debt and still buy the products on offer?
Of course, most of these products came from other countries as our manufacturing base was destroyed and the rest outsourced to other countries, guaranteeing that the bulk of the profits are re-patriated to other countries instead of being kept in this country.
The likes of Germany pay comparatively much higher wages than Britain, yet they are the most successful economy in Europe.
How come they can do it but we apparently can’t?
Incidentally, it is telling that the minimum wage is going to rise by over 11%, but it is still going to be inadequate.
“I have learned through the years a good deal about wages. I believe in the first place that, all other considerations aside, our own sales depend in a measure upon the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales.”
http://www.3spoken.co.uk/2013/01/henry-ford-on-wages.html
Quite so
And given that we need simple and easily understood ways to communicate complicated ideas, this one works very well as metaphor. It’s not about architects and nuclear engineers, it’s about the corner shop. Margaret Thatcher understood that (even though she got it wrong!)
That’s Ford’s quote – from his autobiography.
My Life and Work by Henry Ford, pp 124
The entire Chapter VIII is on Wages.
https://archive.org/details/mylifeandwork00crowgoog or there is the Gutenberg version: http://www.gutenberg.org/cache/epub/7213/pg7213.html
Before 1980, Governments would be far more active in efforts to create jobs or promote circumstances that would result in more jobs.
Since that time Government has retreated or goot out of the way so that it does not “crowd out” Capital in the various markets, so the theory goes. Regrettably, the thinking behind his is flawed, because there are areas of a properly functioning society that Capital won’t touch with a barge pole.
Combine this with the current mindset of “Capital”, which is to make as much money as quickly as possible by any means fair or foul and you have a recipe for that results in the current economic disaster, which is unfolding before us.
Engineered shortages in key goods and services
Historically high levels of unemployment
Unparalleled rent seeking
Weak ineffectual Governments
Giant monopolistic failing to meet the needs of society
Insane levels of inequality
These are the “rewards” of neo-classical economic policies.
I imagine most of the followers of this blog have good ideas for how things may be turned around for the vast majority and perhaps the debate Jeremy Corbyn has fostered is generating ever so small cracks in the current “religious” belief system!
Ultimately, there needs to be a new Bretton Woods. Keynes “Bancor” system should have been introduced, but since, naturally, it hugely benefited the US to have the US dollar as the world reserve currency, that was the system that prevailed.
As I understood it, Keynes Bancor would have worked pretty much like floating currencies are supposed to work now, that is, making your currency less attractive if you export too much or devaluing your currency if you export too little. The idea was that net exporters paid penalties if they did not receive goods from net importers, balancing out the distortions and inequalities that occur when countries manipulate their economy towards net exports.
If Corbyn, in the unlikely event he became PM, should develop our economy inwardly, being self reliant and mainly producing what we want or need in this country rather than relying on globalisation or foreign direct investment. That may necessitate some protectionist measures.
He should certainly work towards breaking up the banks and introduce tight regulation onto the financial sector. He should then structure the economy towards creating wealth by actually making things again, rather than relying on the service industry and banking.
This is what I would suggest anyway.
Noted
How do they arrive at 60,000 fewer jobs by 2020 . What do they really think a person should receive for an hours pay. A part time job as many people have now means they just exist to pay the bills I should think. Take out money for travel to get to their employment before any other expenses and there is just very little to play with. So to pay a fairer wage will damage business, accept our terms or perish is what you seem to be saying. Doomed indeed. 4 hours pay £28 or thereabouts, what can you buy for that.
Henry Ford did NOT put up wages so that company profits might be boosted by employees buying a car. A $2.50 a day pay increase would (assuming a 6 day working week and a 48 week working year) have cost Ford $720 at a time when Model T cars sold for between $450 and $550. That is certainly no ‘pre-condition to success’. Simple basic economics. He knew he might get back SOME of the pay increase but simple arithmetic would have shown him that extra sales would not pay for the pay increase.
No, he increased wages to counter the chronic staff turnover (Ford took on 130,000 workers in 1913 despite having a workforce of just 14,000) and improved competency.
Staff turnover was chronic because the work was tough and monotonous and people left because they could get the same pay with much better working conditions. It was costing Ford a fortune in recruitment and training and almost before the workers became competent they were leaving to go elsewhere.
Ford’s pay increase worked because workers were prepared to put up with the working conditions because they were paid more. If EVERY employer had doubled wages Ford would have had the same problem.
Ford also required that inspectors be allowed into the homes of workers to check that they were living ‘The American Way’ and not gambling or drinking. The wage increase was not available to men whose wives worked or to single women unless they were supporting a family. The wage increase also bought to a halt attempts by some staff to join a union. So wasn’t airy altruism that prompted Ford but to better control his workers.
Ford was of course a success largely because its cars were a lot cheaper than anyone else’s because of the assembly line process he perfected (the cause of the tough working conditions).
But the cause of the success certainly wasn’t it’s own employees buying its own cars. Production rose some 300,000 in less than a decade and Ford had less than a tenth of that number of employees.
The lesson is that if you have tough working conditions then you need to pay staff more to retain them.
I do hope you do a little more research on your teaching syllabus than you seem to have done on the Ford story.
See what Neil Wilson had to say
I think you are jumping the gun a little
Nor do you seem to realise the pwoer of ideas
I see what Neil Wilson has said.
It still makes no sense. Elsewhere it has ben mentioned that the wage increase of the $5 day cost $10m dollars. Enough to buy 20,000 cars yielding a profit of $1.6m. If the Ford workers bought those cars as you claim, Ford lots money. If the Ford workers spent it in their local shops, then the shopkeepers have the money and if THEY then buy 20,000 new cars, Ford still loses money.
But suppose the Ford workers buy other manufacturers cars? Suppose the shopkeepers do. Suppose neither buy any cars?
This argument started because you claimed increasing workers wages so they could buy their own company’s products was “the most basic pre-condition of success”. A direct quote.
It could not in itself have led to Ford’s success. It could not be even a factor in any manufacturing business which is making products not aimed at the general public. It would not be a factor in any company manufacturing low cost items.
In fact can you find one single real world example where your ‘most basic pre-condition of success’ theory can be shown to apply?
You will soon be teaching students in a classroom and you can say anything you like there but they will then go and live in the real world and if they think your concept is ‘the most basic condition of success’ they will surely fail in any business venture.
Ford said it
I would never say it was the condition of business success
I would say it is fundamental to the success of a society
I will not be teaching about business success – that is not what international political economy is about
I could teach it though – I was rather good at running businesses
“Ford was of course a success largely because its cars were a lot cheaper than anyone else’s because of the assembly line process he perfected (the cause of the tough working conditions)”
This is an example of what Marx called ‘surplus value’. The faster you can get a workforce to produce a commodity, the quicker they earn their daily wage. A worker will still earn the same daily wage, but they may well have produced more goods in say, half the time, effectively meaning that the employer gets much more production for far less wages, and therefore, much more profit. Time and motion studies, machinery and production line techniques have cut down the time a worker earns their daily wage, meaning the employer gets the rest of the production for free.
The quicker a worker produces enough to earn their daily wage, the more money the employer earns.
I have to ask why all those companies who are saying “we will put prices up” do not immediately become the subject of a competition investigation.
Precisely
How can they do that, it has to be asked!
Why on earth would they be referred to the competition commission?
They are responding to what actions they would take if costs (in this case labour) were to increase.
This is no different to how any business would respond to an increase in costs, whether it be raw materials, admin, transportation, whatever.
There will be some combination of increased prices, attempts to increase productivity, reduce other costs or accept lower margin.
The distribution of these effects will depend on the specifics of the business and the industry, but it is certainly not something that the competition commission would be involved in.
If a company can pass on cost without constraint then the market has failed
In that case the condition of monopoly exist
In which case a Competition Commission enquiry might be reasonable
This is rather basic economics
Let’s live in the real world, as you frequently say.
Do you honestly think that the likes of Whitbread or Weatherspoons (to take two examples of such companies) will be able to pass on costs without constraint? And that monopoly conditions exist?
In the real world, there will be some mix of the effects I referred to above.
“There will be some combination of increased prices, attempts to increase productivity”
In a market with effective competition a business that increases output will out compete businesses that put up prices.
Whitbread and Wetherspoons use the brand identification trick to create a ‘monopoly of one’ arena. That is what brand management is all about – eliminating competition in the eye of the customer.
If you get firms that abuse the monopoly that brand gives, then they should be subject to a competition investigation and broken up. The threat of a break up should be sufficient to get the management of the company to consider investment and productivity improvements.
The firms are being political by putting these threats into the media. The counter threat should be that there is clearly insufficient competition and innovation in their market place if they believe they can pass on price rises so easily.
As most of the corporates get more profits from speculation than actual production, than it really does not concern them what people are paid. There are plenty of other countries willing to engage in that race to the bottom with the reward of all those so called jobs working for entities supplying goods and services to a non-resident business unit of a multi-national with alleged domicile in a foreign low-tax jurisdiction. There are far too many timid states out there. When will they start standing up to the current world order? I suppose if places like UK, US, EU do not then there is not much incentive.
We all know that this response is pure greed. If you look at the annual national wage case submissions in Australia in the 70s and 80s (yes they had a central court to decide the minimum wage), you will see the constant doom and gloom in the corporates’ submissions if anything other than no increase is paid.
Some things will never change.
Richard
There is a lengthy study of the ‘5 dollar day’ available on the internet by Summers and Raff – 1987.
They go into great detail but don’t mention anywhere about the wage increase being done to or achieving the aim of enabling workers to buy cars. Indeed it would seem an odd strategy as apparently the policy was costed at $10m dollars a year which was half of the then company profits. Even if 100% of that was spent on Ford cars that’s only 20,000 new cars which would have generated profits of less than $1.6m – Ford was only making about $80 dollars profit per car.
They put much of the huge growth in production from 1914 down to the changes in production methods (The full ‘Assembly line’ and ‘single purpose tool’ production methods were not finalised until late 1913)
This may be one of those internet myths which don’t stand examination.
It’s not about paying the car workers enough to be able to buy a car, that’s the same fallacy as suggesting the cruise ship labourer should earn enough to buy the cruise ship, a deliberate misrepresentation.
For the cruise ship analogy, it’s about paying the labourer enough to afford to go on a cruise ship holiday, thus increasing the profitability for the owner of said cruise ship to be able to buy more cruise ships, to offer holidays to more decently paid labourers to pay for cruise ship holidays…..
Precisely
Agreed that Henry Ford did not pay his own workers more so that they could buy the cars they themselves produced. But this question has to be considered at the level of the economy not that of the individual employer.
The post-war rise in real wages in Europe and North America stimulated demand not just for cars but for a whole range of products. That increased demand then made it possible for employers to pay higher wages, and so on, creating a ‘virtuous circle’ that lasted for two or three decades before breaking down.
Since then the stagnation in real wages has suppressed demand (disguised for many years through increasingly risky loans) which in turn makes it harder for employers to raise pay, so the circle has now become vicious.
For a rise in minimum wages to both stimulate general wage growth and sustain employment, a high level of demand in the economy will be required. If pay rises hit the wall of austerity suppressing any rise in demand, then there will indeed be a risk to jobs. But that’s just another reason to oppose austerity.
Didn’t Henry Ford suggest to a union boss from th United Autoworkers that robots were the future because they worked non-stop and never went on strike.
The union leader politely asked how many cars did he envisage them buying!
I have no idea if he said that
If he did he was right and wrong
Paul Mason explores a world where work may not be needed in Post Capitalism
Richard I certainly agree with the theory of increased wages leading to greater consumption, economic growth and a move to a more equitable society; however, since in this case the increase in wages for low paid workers will be off-set by cuts to in-work benefits that will leave many people worse off, we may well not see those economic and societal benefits arising; and any savings to the treasury as a result of the benefits cuts are not going to be used in a progressive, redistributional manner
Some of your commentators do seem to have problems understanding second order effects.
The idea Henry Ford increased wages, so Ford employees could buy Ford cars is, of course, nonsense. But so’s the idea that a general increase in wages will feed through into more consumption, more manufacturing & pay for the wages. A general increase in wages will feed through into higher prices, right through the economy. Because the cost of all the inputs rises. Higher raw materials & bought in parts for Ford factories. Higher bills at the shop when workers spend their wages. Consumption will remain static
All you’ve invented is pay rise driven inflation.
At some point in there you need increases in productivity, to create the surpluses comprise increased consumption, can sustain REAL pay rises.
You’ve never heard of surplus value then? Employers pay as small a wage as they can get away with.
if workers do not have enough money to buy, then they do not have enough money to consume and businesses sell less goods.
Of course, most manufacturers have boosted profits by simply moving the factories to low wage countries.
For quite a number of years, the only thing keeping the economy moving was consumer borrowing. Unions were weakened and our manufacturing base was largely destroyed. Most of the manufacturing left in this country is now foreign owned. We have a low wage, low skill, “McJobs” service economy. Low wages have pushed up profits but has kept the economy scraping along the bottom.
Your inflation argument doesn’t stand up either. While there is spare capacity, more money creates more business. With today’s production rates, it would be difficult for inflation to go up because “too much money is chasing too few goods”. In the recent past, borrowing from banks is probably the most responsible for inflation, with prices having to rise to offset the cost of interest.
More money put in the hands of ordinary people creates more spending and more money put into circulation which is captured by business who produce more.
Simple economic fact.