The (surprisingly durable) Henry Ford worker-as-customer myth

Megan McArdle is the latest to refute the notion that Ford’s high-wage policy was meant to put workers in a position to buy his products [Bloomberg View] We linked Marc Hodak on the same subject in July.


  • I call BS. I believe the article is based on a false premise. I don’t think anyone has ever argued that Ford’s decision to raise wages would mean his company would do better because HIS employees could afford to buy HIS cars. I could be wrong, but I would like to see some cites to reputable sources.

    It is indisputable that the raise Ford gave his employees would enable them to buy his cars. Ms. McCardle shows us this with her math. What Ford did was show that higher wages did not necessarily translate into lower profits (Ms. McCardle and Mr. Hodak agree with this premise). So, the argument goes, if McDonalds raised its wages, it would not necessarily mean lower profits. However, (as Ms. McCardle and Mr. Hodak point out), not every business can have wages above the median because, to do so, would defeat the purpose of raising wages to get better workers.

    In truth, the real reason behind the raising wages campaign is to more evenly distribute income. Perhaps this is a socialist (light) idea (which some might think bad), perhaps not. Personally, I think that, if wages were distributed more equally, the country would be better off. The wealthiest would benefit (by being able to sell more of their stuff) and everyone would be better off as a whole. I would suggest that public policy should be directed in this way.

    Even Ford’s website refutes the notion that it raised wages solely so its employees could buy cars.

    As McCardle points out, there were many, many reasons for raising wages and the nation (especially in the Detroit region) reaped benefits from doing so. But there are not many who claim the only reason was so employees could buy a car.

    The title of the article should be “Ms. McCardle, meet the strawman”

  • Funny. I always thought that the motive behind Ford paying his workers more was to keep skilled workers from going to other automakers.

  • McCardle sort of missed in her 4th paragraph too. She cites the price of the car at $700, somehow counts that as labor only, and then adds the cost of materials.
    More likely, labor could be $300, materials another $300, and $100 for overhead and profit. That’s how manufacturers arrive at prices.

  • She cites $825, but uses $700 for her example.

  • All of these analyses are overlooking a fundamental difference in the industries that Henry Ford operated in back in 1914 and the retail market of today in which Wal Mart operates. At the time, the auto business was booming. the limiting factor on how many people owned cars was how many could be produced rather than how many were demanded. Ford could afford to produce more cars at a lower margin because he could be reasonably sure that there would be buyers for them, whether they were his employees or someone else.

    On the other hand, today’s retail market is saturated. No one is forgoing purchasing groceries, soft goods, or nondurables because they don’t have access to a store.The total amount of goods sold are likely to be rather constant in these markets. What relative price levels among retailers will do is determine who sells how much of that constan-sized market.

    IN other words, the number of cars ford sold was not limited by the number of cars Dodge did; they wree both feeding into an expanding market. On the other hand, if Wal Mart raises its prices, all of a sudden it loses it’s primary market advantage. If their costs are on par with Target or Pennys, their market share shrinks.

    You can also argue that in 1914, the industry still didn’t know how to build cars efficiently. Ther was still a lot of hand wor involved that today is done iether by robots or is unnecessary because of advanced quality techniques. In retail, mostly led by Walmart, the competitors have learned to wring that inefficiency out of their supply chains. Walmart can’t sell more at lower margins becasue the market size is already fixed, and the margins are already as small as they can be and generate a profit.

  • In fact McCardle is wrong in her lede:
    “The other day, I noted in passing that it is arithmetically impossible, except in some bizarre situation with little bearing on the real world, to make money by paying your employees more and thus enabling them to afford your products.”
    In the Real World described above by Another guy named Dan, Ford actually could make money selling to its own employees as long as the increased marginal cost of labor stayed below the profit per vehicle sold. They might only make $20 on the one they sell to the employee, but if they make $100 each on the other 9 he produces, they still come out way ahead. McCardle’s example is too simplistic to be relevant.

  • Canvasback seems to be missing my point. I was trying to explain that even if, arguendo, Henry Ford made mor profits because, not just after, he raised wages, it was because of a confluence of factors that do not apply to Wal Mart today.

    If you double wages without increasing productivity, you will get a deadweight loss. Ford was able to increase productivity in excess of the wage gains specifically because he was in a young industry that had yet to figure itself out. There were still huge productivity gains waiting to be made through investment of capital.

    IN contrast, retail, especially at the low end, has already realized just about all of the productivity gains that can be realized at the current level of technology. Scan guns and even self-service checkouts have increased the productivity at checkout, and barcoding has removed most of the labor from pricing. Until and unless you can automate stocking shelves (and there’s some interesting ideas out there on that) your not going to see another big jump in retail productivity that would allow for the doubling of wages in the sector.

  • Canvasback,
    Ford would still make $100 on the car sold to the employee. The labor is included in the price of the car, no matter who buys it. If Ford offered an employee discount, then it would be another matter.

    Your math here sounds like a Liberal claiming that not taxing something is a loss for the Government.

  • I agree. She took on a straw man and almost lost.