Adam Smith on Ford's $5 a Day

If paradoxes of thrift could be solved by individuals there would be no paradox :)

I agree that this "efficiency wages" explanation is the right one. I'm sure Ford hoped and expected his workers would drive a Ford, but that clearly wasn't the point of the $5 day.

Obviously it doesn't make sense for any company to pay more to increase demand for its products; its workers constitute a tiny percentage of its customers. That anecdote has always struck me as questionable; Ford was no fool.

That does not mean, though, that it doesn't make sense for a whole economy.

I know you know the difference between the ant and the anthill; are you being intentionally obtuse? See Daniel Kuehn's first sentence above.

Broad-based demand is necessary to keep the whole economic log rolling and growing. That broad-based demand only comes from well-paid workers.

When wages as a share of national income drops too far, the log stops rolling, the wheels come off the bus.

As a direct sales driver I agree this makes little sense. However, there is a quality benefit from having your employees use your product. They are the ones best equipped to find solutions to product flaws which they are much more likely to notice if they are using the product.

@Steve Roth,
Not only am I not being "intentionally obtuse" but also I'm not being obtuse at all. I'm simply addressing the Ford issue.

If paradoxes of thrift could be solved by individuals there would be no paradox :)

Let me fix that for you:

Since the paradox of thrift is solved by individuals, there is no paradox.

If I had a dollar for every book I've read which perpetuated that myth, I'd be eating a meal in a really nice restaurant tonight.

Broad-based demand is necessary to keep the whole economic log rolling and growing. That broad-based demand only comes from well-paid workers.

And well paid workers can only come from a productive economy. If you fiddle with just the numbers on their paychecks across the board, its the meaning of those numbers thats going to change, not the economy. Well, not in a good way, at any rate.

Let me dismantle the unstated but looming fallacy explicitly before it rears its ugly head once again: there is no market failure here, in the sense of there being a possibility of increasing total output of the economy by forcing up wages across the board.

Ford had a very productive company, which allowed him to pay higher wages. Ford wasnt the only one; it was a time of massive increases of productivity in all sectors of the economy. Absent these increases in productivity, the same changes in wages would have led to obvious disaster; not to the sudden invention of the combustion engine and the assembly line.

Two things:

- Ford was worried about unionization, so raising wages was a win-win for workers and management. Workers got more pay and Ford got to continue driving up productivity without dealing with union featherbedding.

- Ford was setting an example for other capitalists. He was putting his money where his mouth was on the key question of whether the economy is a zero sum game fought out between capital and labor or whether technological advances, such as Ford's biggest breakthrough, the moving assembly line of 1914, could make it a positive sum game.

Ford couldn't sell many Model Ts to millionaires, but if the other millionaires came around to his way of thinking about the economy being a positive sum game and invested heavily in their own moving assembly lines, then he could sell millions more Model Ts to their workers.

Steve Roth - I don't follow your point. Let's imagine a society built on slavery. In this case,
a small minority, the elite, lives in luxury, waited on hand-and-foot, another, somewhat larger minority, is the military, all the rest are slaves. The slaves do all the work, and only get enough subsistence to be able to raise the next generation of slaves. The slaves are larger than the total number of the military and the elite.

Occasionally a member of the elite or the military invents something useful, increasing labour productivity (the slaves are too poor to do so). Now why couldn't this extra productivity be just consumed by the elite and the military? Think of Ancient Egypt, with that massive diversion of resources into really big tombs. Or the palace of Versailles. (I know that there was more general wealth in those societies than in my model, all I'm thinking of here is big prestige products).

There are many disadvantages to such a society, but macroeconomically it strikes me that they're on comfortable ground.

A large share of societal wealth going to labor is a very recent phenomenon (and not necessarily an enduring one). For most of human history a small group of elites monopolized all wealth and capital.

For 10+ yrs I've thought it was well-established that it was a so-called ''efficiency wage'', to minimize turnover, disgruntlement and sabotage, and to get better workers (not necessarily in ability, but in motivation and work ethic).