This is the first of a series of posts that will ask what the most pertinent question raised by a prominent influencer of political economy might have been, and what the relevance of that question might be today. There will, in due course, be a list of all posts in the series at the end of each entry. The origin of this series is noted here.
In 1914, Henry Ford shocked the business world. He announced that his factory workers would be paid $5 a day — double the going rate. To most employers, this was lunacy. Wages were seen as a cost to be minimised. Ford's logic was different. If workers couldn't afford the cars they made, there would never be a mass market for automobiles. By raising wages, he wasn't giving charity; he was creating customers. He was also, admittedly, seeking to reduce union power.
That single decision did, however, become folklore in economic history, but not because Ford was a benevolent capitalist. He was hard-headed. He understood a paradox that capitalism itself tries to ignore: labour is both a cost in the production ledger and the foundation of demand in the wider economy. Ignore the second role, and you collapse the market you depend upon. This duality cannot be avoided, and yet most businesses, economists and politicians try to do so.
This, then, leads to the Henry Ford Question, which is: How can prosperity be sustained if labour is treated only as a cost to be cut, rather than as the source of the demand that keeps the economy alive?
1. Wages are more than a cost
Mainstream economics has, for decades, encouraged businesses and governments alike to see wages only through the lens of competitiveness. Lower labour costs supposedly mean cheaper products and bigger profit margins, or so the argument runs. Trade theory treats wages as an “input” to be reduced to gain an advantage in the global market.
But in the real economy, a wage is not simply a cost. It is simultaneously somebody's income, and the incomes of working people aggregate into the demand on which businesses depend. Cut wages across the board, and you are not just “saving costs”; you are draining the very purchasing power that drives sales.
Ford understood this, instinctively. If his cars were to become truly mass-produced, they had to be mass-consumed. His workers could not remain a pauper class building luxuries for the rich. They had to be able to buy the product themselves.
2. The productivity paradox
Modern capitalism loves to talk about productivity. Automation, AI, lean supply chains; all of these promise higher output per worker. In theory, that higher productivity should mean higher wages. In practice, over the last forty years, productivity and wages have been decoupled.
Output per worker has risen steadily. Wages for the majority have stagnated. The surplus has gone to profits, dividends, and executive pay. This is the productivity paradox: we can produce more, but the gains are not shared.
That decoupling has dangerous consequences. Goods now exist in abundance, but mass purchasing power based on wages has lagged.
The gap has been filled with household debt. In the US and UK, cheap credit became the sticking plaster that allowed workers to keep consuming despite stagnant wages. When the credit system cracked in 2008, the illusion collapsed.
Ford, more than a century earlier, had avoided that paradox: he aligned productivity gains with wage gains, so that output and demand rose together.
3. The fragility of demand
Economists talk about “aggregate demand” as if it were an abstract. In reality, demand is the ability of ordinary households to spend on food, housing, energy, transport, education, and leisure. When those households are squeezed, demand falters.
This fragility is visible everywhere:
- Insecure work. Zero-hours contracts and gig labour erode income stability.
- Stagnant pay. Median wages in the UK have moved little in real terms since 2008.
- Rising costs. Housing, childcare, and energy swallow disproportionate shares of income.
The effect is macroeconomic. Businesses invest when they see demand. When demand weakens, they hold back. Lower wages might look good for an individual balance sheet, but when every firm squeezes simultaneously, the market shrinks. It is the fallacy of composition applied to labour.
4. Demand collapse and crisis
History is replete with examples. The Great Depression was not just a stock market crash; it was a collapse of demand after years of wage suppression and speculative bubbles.
Post-2008 austerity in Europe repeated the mistake: governments cut public wages and spending, deepening recession when demand was already frail.
The lesson is simple: demand collapse is the natural end-point of treating labour purely as a cost.
Ford's $5 day was a crude but effective form of demand insurance.
Today, we have dismantled such insurance. Labour's bargaining power is weaker than at any time since the nineteenth century.
The result is a global economy held together with private debt and speculative bubbles — precarious, brittle, primed for crisis, and that crisis is now turning to anger, as we are seeing .
5. Distributional justice as macroeconomic stability
Wages are not just a fairness issue; they are a stability issue. Economies with stronger wage shares - where labour takes home a larger slice of national income - are less crisis-prone. That is because consumption is more stable when it rests on wages rather than on debt or asset speculation.
Every pound in a worker's pocket has a higher propensity to be spent than a pound sitting in a Cayman bank account.
High wage shares keep demand circulating.
High profit shares leak into financial speculation, inflating asset bubbles rather than sustaining the real economy.
Ford grasped that crude principle. Today's policymakers have forgotten it. Labour's share of income has been falling for decades, and instability has risen in step.
6. What Ford tells us about today
What does the Ford Question demand of us now?
First, rebuild labour power. Strong unions and sectoral bargaining are not nostalgic relics; they are stabilisers of demand. They ensure productivity gains flow into wages.
Second, deliver progressive taxation. Left to itself, capital hoards the surplus. Progressive taxation recycles it into public services and investment, sustaining mass purchasing power.
Third, deliver public investment in wages. Care, education, and green transition jobs are labour-intensive and wage-sensitive. Public spending in these areas doesn't just provide services; it anchors demand.
Fourth, reject the “labour cost” fixation. Competitiveness cannot be built on perpetual wage suppression. A society of underpaid workers is not competitive; it is brittle.
Inference
The Henry Ford Question remains unanswered. We are still trapped in the contradiction he spotted: if workers are only costs, who buys the output? Ford's $5 day was not a gift to his employees; it was an act of system maintenance.
The problem is that we have lost sight of that lesson. By prioritising shareholder returns and managerial bonuses, we have forgotten that prosperity requires redistribution.
The resulting paradox is stark: pay more, and the economy works; pay less, and it stalls.
Ford's insight was brutal but true: you cannot have mass production without mass consumption, and you cannot have mass consumption without fair wages. That is the challenge modern capitalism keeps trying to evade.
Previous posts in this series
Taking further action
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While there was a very dark side to Henry Ford both he, his most famous product, the Model T & his Company are fascinating.
I just wish there was a good book somewhere
‘The Machine That Changed The World’ is a wider look at the development of mass manufacturing in relation to cars, so Ford is included as an important part of that history.
Makes total sense. Short, pithy and to the point.
Keynes realised the importance of demand and post war real wages rose. But it was a different world in many ways. We need a new narrative for our times.
Wages need to rise but the jobs need to be there for the workers to enjoy the wages. Every day seems to bring more job losses, be it in hospitality or local government due to the effects of government action or the effect of automation on manufacturing jobs and, in the not too distant future, driving jobs.
This is an issue, but don’t doubt it is deliberate.
Following this to a logical, but hypothetical, conclusion ; when one man with AI controls all production and returns to productivity who buys his products?
Perhaps we are approaching a (very distant) world where machines do all of the work and man reaps all of the leisure / time to pursue….what?
I really don’t think that is what the owners of AI think is likely
The hot accounting approach to business, cost cutting, reducing worker benefits, reducing jobs, “efficiency”, maximising profits, returning shareholder value is lauded as the only way.
The current UK government parrots that public services must do more with less. AI will
cut public sectors jobs etc.
As you point out less money in the economy means less money to be spent.
Just where do businesses think the customers will come from if they seriously reduce the money available to the “workers”?
Then they will scream “we can’t afford to pay the benefits to those shirkers”.
Result even more austerity. The cycle of misery repeats itself ad nauseum.
The contradiction sounds very much like Marx.
When Marks and Spencer moved its clothes production offshore many people, mostly women lost their jobs – not just in the factories but in the industries serving them.
There was discussion at the time that this would affect the pool of people able to pay the slightly higher costs of M&S clothes and was therefore something of an own goal.
I can find no evidence for this but it does go along with Ford’s thinking.
Agreed
As John Boxall notes, there was a dark side to Henry Ford (anyone whose taught “scientific management” to students, or read upon it will know some of why). But I’ve always thought that his “rule” – that paying a decent wage to workers meant you created potential consumers of your product – was about the simplest and most straightforward way to explain supply and demand anyone who doesn’t have any knowledge of economics. Indeed, I used the Ford example in teaching material on multiple occasions.
Isn’t it so very, very, strange that even this example – which comes not from a Marxist, leftist, of even progressive, but a hard headed capitalist – is still too much for our Chancellor and Prime Minister – and many others – to get their heads around.
Or perhaps more likely, given how simple it is to understand, what’s really going on (and has been for years now) is a deliberate strategy to force the working person to lend to survive. The fact that they owe money then simultaneously becomes both yet another mechanism of control, and another source of income and wealth for rentiers/the rich and their legions of minions.
Much to agree with, including on Ford himself. This move was union busting.
What do the very rich do with their money, some of it gained by underpayment?
Lend it back to the poor and charge interest. Did Marx foresee that?
They also gain if taxes are cut so the govt has to borrow more. Perhaps why Republican administrations run larger deficits than the Democrats. (While deploring it when done by Democrats )
Very good 🙂
I love you comment. “if workers are only costs, who buys the output?”. That sums it up.
Neoliberal economist seem to repeatedly make the false assumption that wages and benefits are a sunk cost, as if they fall into a black hole. This false narrative is at the core of many economic problems.
Also, I suspect the current orthodoxy would see these ‘high’ wages as leading to high inflation.
Which begs the question: if we were to follow on along these lines, paying people more, what would that do to inflation? Anything? Nothing? Middling? I suspect the answer might contain the words ‘It depends’ (which is often the start of an interesting discussion and learning experience).
Presumably, clever bods at the Treasury, in academia, and in the ‘think tanks’ are aware of this example, but choose to ignore it. or is it not taught, or given any credence?
Modern economics makes the assumption that wage rises are bad, because they are a source of inflation. And the Bank of England seems to be solely interested in controlling inflation, using pretty much the only tool is has, interest rates (a crude tool). But of course, inflation can be caused by many factors. Interest rates are really only effective if the cause of inflation is excessive demand, but where it is a supply factor, interest rate rises are largely ineffective, and worse, can make matter worse, undermining demand in the economy without having any noticeable effect on inflation. The ‘independence’ of the BOE is a major failing of the current system, as it fails to look at the macro economy, and the role of the state in influencing total demand in the economy, and picking up the slack if the private sector is in a slump. I find it interesting that during the recent inflation cycle the Central Bank of Japan, did not increase interest rates, and continued to carry out quantitative easing. Inflation peaked at lower level, and then fell again. If the cure for the inflation was to increase rates, why did the opposite work in Japan? Of course government borrowing in Japan is a very low level of interest, so not talk of a government borrowing crisis there. Also the Japanese are trying to increase workers wages to stimulate demand. We should pay more attention to what they are doing.
Excellent question.
Answer, the problem was external and the central banks who raised rates internalised it, making it worse. Japan did not.
Some tech whizzes are predicting AI will lead to 90% of the workforce being out of a job within 5 years. Even if that is overstated, at what point will economies collapse due to lack of buying power amongst the unemployed population? How long before massive private debt becomes unsustainable? When paying human workers becomes unaffordable for the private sector, the only potential employer will be the state. Yet neoliberal ideology infecting those currently running/ruining the state says public spending is too generous as it is, let alone with far more people likely to join the ranks of the unemployed in the near future. Starmer & co encourage the use of AI in the UK, hastening the process. Tech companies and their political placemen that are hoping to make a killing with AI in the near-term might eventually find that they’re biting off the hand that feeds them, as there will be ever less value available to extract from those without reliable income and in debt bondage. A parasite feeds off its host, so eliminating the necessary conditions for the host to prosper is not a good idea, yet that’s where we’re heading. Will that increasing part of the populace that is reduced to serfdom just lie down and accept its fate? At some point it might click that immigrants and other scapegoats are less to blame for this state of affairs than the unthinking transition to a world where humans could become seen as surplus to requirements. At that point the system must switch to a new state to mange this state of affairs – either totalitarian repression or breakthrough to a more egalitarian settlement that values diversity and the lives of ordinary people. A lot of good ideas exist (including those mooted on this blog) that could facilitate the latter, but the Thiels and Musks of this world are doing their best to thwart that prospect.
Jim
This is an argument in absurdum
If 90% have no work there is no market
There is no business
Pay8ing workers cannot be unaffordable for the private sector because they are the customer
Your logic is unidimensional and fails for that reason
Richard
Yes, you’re right that it’s absurd, but that is the current direction of travel, according to AI tech experts who are deeply involved in the development of AI.
I question whether they are experts then.
Without question, 90% is an absurd figure. It’s apocalyptic marketing because the apocalypse sells.
But one does get the sense that eliminating reliance on labor or distancing themselves from labor (in all respects) is a long held fantasy for the billionaire class. They’ve already created a superclass of wealthy consumers, which is currently giving them much leeway in the US economy; they’re no longer so tightly leashed to the demand constraints of ordinary consumers. I don’t doubt they would do worse, if they thought it would give them total freedom to do as they please. Perhaps this explains the recent push towards slogans like, “slavery isn’t so bad,” or “slavery had its upsides.” Lord forbid we actually just pay people a decent wage.
“Fourth, reject the “labour cost” fixation. Competitiveness cannot be built on perpetual wage suppression. A society of underpaid workers is not competitive; it is brittle.”
Germany 19th century: wage suppression in mfu & high food prices (keep the junkers in business) – led to large-scale emmigration – but Germany as of circa 1905 had easily overtaken the UK – industrially (& the writing was on the wall @ the time of the great exhibition)..
Germany post 1945: wage suppressions in mfu – led to the wirtschaftwunder.
Germany under Schroder – Hartz iV (I think) wage supression. The Germans seem to be experts @ wage supression & yet – pretty successful. Perhaps the brittleness is now starting to show? I don’t disagree with the overall thrust of the argument – but the German examples do beg some questions.
Fair enough
Allow for open societies….
People went to the US
Where would they go now?
Mars??
Mr Parr,
I shall defer to you on German post-war economic history; I claim no distinctive knowledge. I would merely hypothesise that the reason for the remarkable German post-war recovery may lie in a complicated tension between Erhardian Ordoliberalism, and the role of the Federation of German Industries in economic coordination from the time of the Korean War; but which “laid the foundations for the restoration of Germany’s corporatist structure” along with a return to “collective wage bargaining autonomy and codetermination” (Josef Hien, ‘The rise and fall of ordoliberalism’; ‘Socio-Economic Review’, Vol.22, Issue 4, October 2024, pp.1947–1966); an emphasis on collective bargaining and welfare reforms supported by Adenauer in opposition to Erhard, and which in my memory, through the 1960s-80s was often the subject of debate in Britain, about the success of wage bargaining/codetermination in Germany, and its extraordinary economic success, compared to Britain; the British excuse was – we didn’t have the Marshall Plan so that explained why we were doing so badly.
In plain English (via ChatGPT) because this was opaque:
The writer admits they don’t know much about German post-war economic history, but they suggest a possible explanation for Germany’s remarkable recovery.
They think it came from a mix of two things:
1. Ordoliberalism, the economic philosophy pushed by Ludwig Erhard, which focused on rules for markets and competition.
2. The power of German industry, especially after the Korean War, when business groups helped coordinate the economy.
This combination ended up recreating Germany’s corporatist system – where workers, employers, and the state cooperated. That meant strong collective wage bargaining (unions and employers negotiating pay) and codetermination (workers having a say in company decisions).
Chancellor Adenauer supported these social reforms, often against Erhard’s more market-driven views.
In Britain, people debated through the 1960s–80s why Germany’s system of wage bargaining and worker involvement was so successful, while Britain struggled. The usual British excuse was: “We didn’t have the Marshall Plan, so of course we did worse.”
ah, my opacity. For context, my reply was to Mr Parr, to whom I had deferred on the matter of background depth of knowledge of (West) Germany at this period. This also allowed me to write a response to him, confident that he would understand my argument, taking certain facts as given. Given that Mr Parr’s interesting observations were, I hazard (and without criticism), even more opaque than mine; I assumed anyone reading through his comment would need a little knowledge of place and period, which would allow me to follow suit without elaboration.
And if I felt explanation was required, as editor, that was my right.
I am bemused by your current belligerence, John. It’s also wearing. You have better fights to pick.
Richard,
Liked this article. Some thoughts:
Productivity is about doing more for less Less resources to create a unit of output. UK Productivity has been a major issue for decades.
Productivity isn’t everything, but in the long run it is almost everything.’ from
Paul Krugman.
This productivity issue must have impacted real incomes of people?
Another factor might be that since the late 70s monetarism and monetary policy have been the macroeconomic approach judging by politicians and the media.
This seems to be directly relevant when using interest rates to curb inflation.
Inflation reduces real incomes so purchasing power falls and the BoE raises interest rates which further reduces real incomes through raising costs of mortgages etc!
So if we think we should be paying people a fairer share of the fruits of economic effort, which I agree with we should also:
1. fix our Productivity issues to drive up real incomes, and
2. Replace monetary policy as the dominant tool in UK macroeconomic policymaking. Since it acts to suppress real incomes.
Agreed?
But, ever rising productivity leads to total automation without new jobs being created or monetised (e.g. childcare). So, why necessarily make it a goal?
Richard,
Your right. Ever rising productivity implies all jobs automated. Our technology advances are developed often with Labour saving in mind because there are few pressures to enhance productivity of an individual in a different way.
However despite the wave of job destruction over the years many have not been destroyed and quite a few new ones have come into existence in certain sectors. For example Database Administrators a well paid job didn’t exist when I first got interested in computing.
That said I was pointing out that macroeconomic policy for many years has been run in a narrow way using monetary thinking.
The BoE mandate talks of price stability without reference to contributory factors like productivity.
At least making productivity more central in economic policymaking would lead to a focus on the main economy, skills and education and R&D, etc.
The latter would be a beneficial change imo.
Could you direct me to the Sheffield Uni paper on the economy and the city?
https://eprints.whiterose.ac.uk/id/eprint/143275/1/Baker%20The-UKs-Finance-Curse-Costs-and-Processes%20final.pdf
Enjoy!
A really good piece, thanks PSR and RJM. This would make a good short video.
I will think about that.
‘High profit shares leak into financial speculation, inflating asset bubbles rather than sustaining the real economy.’
Your post emphasises the importance of distributional equity between labour and capital in the macro-economy. Since additional purchasing power ( in the form of new money/debt ) can be created only by the government ( fiscal deficits monetised as bonds) and commercial banks ( loans through book entries), who controls these levers and how they are used decides this distributional equity. Would it be right to postulate that Quantitative Easing ( QE) in economies like the UK ( and USA) meant wholesale purchase of govt. bonds ( by the Central Bank) from commercial banks/other financial institutions, which enabled them to harness new purchasing power? That this new purchasing power/ funds were invested in the stock market/real estate, raising asset prices and benefitting those holding these assets ( primarily the wealthy), thus reducing the relative purchasing power/income of the rest of the population which relies on wage income.
Can you do a post on how changing/regulating the process/levers of creation and distribution of new purchasing power in the economy could counter this pernicious trend?
Your hypothesis explains what QE was designed to do. The first answer is never do QE: just use expanded reserves instead. Then, don’t pay interest on those reserves.
Henry Ford also famously said: “It well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning! Did he have an insight into what we now call MMT?
Yes
SLOGANS
I know the danger of oversimplifying solutions for inequality. And also falling into the trap of thinking we need the rich to fund spending. However, we do need straightforward messages to combat simplistic slogans from the far right. Or am I misguided in saying this? People need hope, they need to see positive action from their politicians. I’m not a campaigner but slogans with visuals such as :
PEOPLE BEFORE BILLIONAIRES
STOP ELITES HOOVERING UP WEALTH
Or am I kidding myself?
Worth a try