On Henry Ford’s 150th Birthday, His Greatest Insight Has Been Tragically Forgotten

On Henry Ford’s 150th Birthday, His Greatest Insight Has Been Tragically Forgotten

GUS LUBIN JUL. 30, 2013, 10:15 AM 15,137 73

fredgraph-69

Henry Ford, who was born 150 years ago today, is remembered as the guy who unleashed the full potential of the assembly line, beginning in 1913 when the Ford Motor Company cranked out Model T’s much faster and cheaper than anyone could imagine. But his business philosophy, known as Fordism, went beyond the implementation of mass production. Ford argued that high wages were essential for economic and moral reasons. As he wrote in his autobiography: What good is industry if it be so unskillfully managed as not to return a living to everyone concerned? No question is more important than that of wages — most of the people of the country live on wages. The scale of their living — the rate of their wages — determines the prosperity of the country. Ford set a powerful precedent in 1914 when he doubled wages for workers on his assembly line in Detroit, Mich. The move was in part a reaction to high turnover among his workers, who found the work too hard and unrewarding. At the same time, he argued that it was good for his business. High wages support a good market:

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. Country-wide high wages spell country-wide prosperity, provided, however, the higher wages are paid for higher production.

High wages lead to good products:

The kind of workman who gives the business the best that is in him is the best kind of workman a business can have. …[I]f a man feels that his day’s work is not only supplying his basic need, but is also giving him a margin of comfort and enabling him to give his boys and girls their opportunity and his wife some pleasure in life, then his job looks good to him and he is free to give it of his best. This is a good thing for him and a good thing for the business.

Whatever the reason, Ford’s higher wages were successful. Applications to work at the Dearborn, Mich. factory soared and turnover plummeted.

Ford’s advanced production methods were so effective that other automakers and companies in every industry followed suit. Fordism, “the eponymous manufacturing system designed to spew out standardized, low-cost goods and afford its workers decent enough wages to buy them,” spread rapidly around the world.

It was good for the workers too. The average Ford worker in 1914 had savings of $207.10; workers who stayed at the factory for the next five years would amass $2,171.14 in savings on average, according to author Richard Snow. Sure enough, they were entering the middle class.

Ford imagined a bright future in which wages would keep on rising:

What do we mean by high wages, anyway? We mean a higher wage than was paid ten months or ten years ago. We do not mean a higher wage than ought to be paid. Our high wages of to-day may be low wages ten years from now. If it is right for the manager of a business to try to make it pay larger dividends, it is quite as right that he should try to make it pay higher wages.

So what happened?

As smart as Ford was, his vision of capitalism would become dated by the 1970s. As described by Walter Russell Mead in “The Decline of Fordism and the Challenge to American Power“:

The trouble is that capitalism did not stop with Henry Ford and the system named for him. The era of regulation, income equality, state planning and stability has gradually been yielding to a new form of capitalism over the last generation.

Many writers have worked to describe the difference between Fordism and what we might as well call “millennial capitalism,” the new system we seem to be inventing and exploring. For some, the shift from Fordism to millennialism is a rake’s progress: the end of a system that produced peace, justice, mass prosperity and social security and the rise of a grotesque new system of inequality, instability and bare-knuckled competition in a hideous, neoliberal dog-eat-dog world. For others, the shift represents the glorious triumph of technology and entrepreneurial spirit over a decadent and stagnant era, and the new and more dynamic capitalism offers opportunities to eliminate poverty and transform the human condition. No aspect of Fordism became more passé than his ideas about high wages. While liberal economists like Robert Reich still argue about the economic benefits of greater income equality, corporations have realized that they can get away with paying relatively less and less.

For a visualization of what has happened on this front in the past half century, check out a graph of corporate profits relative to GDP versus employee compensation relative to GDP:

While corporate profits relative to GDP are soaring, employee compensation relative to GDP has steadily decline.

And it’s not just a case of rising tides: median U.S. income in 2012 fell to levels not seen since 1995

This chart doesn’t even include the vastly lower wages received by a growing population of foreign laborers who work indirectly for U.S. corporations. Just look at how bad conditions are for garment workers in Bangladesh or tech workers in China.

The industrial revolution is not continuing as Ford predicted, and — at least as far as wages are concerned — that’s a tragedy.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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