Comment by gruez
21 days ago
>Maybe Henry Ford was on to something when he shocked the world by paying his employees enough to afford the product they were making (more than doubling many workers' wages)...
That's a nice story to tell, but the economics never works out if you do the math. Whatever extra wages you pay, you only get a fraction of that back in increased sales. How much percent of a worker's income do you think is spent on a car? As a rough measure we can use the BLS's CPI weights for "new and used vehicles", which comes in at 7.4%, with an extra 1.4% if you include maintenance and parts. By that alone "paying his employees enough to afford the product they were making" is going to be a losing proposition, because Ford can only hope to get 8.8% of whatever they paid in wages back as revenue. And all of this is ignoring the fact that you can't pay extra wages out of revenue, only profit, so you can only hope to recoup a fraction of that 8.8%.
thats an overly simplistic way to look at it. Of course you can never get more money from your employees' purchases than you give them, that makes no sense. The point is using your market power as a large employer to raise market salaries. People will not want to work for your competitors or other sectors if they pay half what you do. So when you rise, naturally other salaries will rise too. And those other workers will also be buying cars.
Whether that makes sense economically is a difficult problem to quantify, especially over any fixed timeframe. I would guess not, at least if your brand isnt insanely strong (on the level of half or more people with enough money would buy it)
It's a collective action problem. If everyone pays higher wages, there's a greater supply of money for buying stuff / solving problems (assuming the higher wages aren't eaten by rents). No individual form recoups all of the higher wages they pay their workers, obviously, but there's a larger market for the goods of everyone has more money.
>If everyone pays higher wages, there's a greater supply of money for buying stuff / solving problems (assuming the higher wages aren't eaten by rents). No individual form recoups all of the higher wages they pay their workers, obviously, but there's a larger market for the goods of everyone has more money.
Does this actually work? Suppose you're on an island where the economy only produces coconuts. How does giving workers more coconuts make the economy grow, such that there's more coconuts to go around overall? Unless the workers were absolutely famished, giving them more coconuts isn't going to increase productivity. You might argue this model isn't representative of the real world, but that's approximately how the economy works. It can produce a certain amount of "stuff" (ie. coconuts), of which some portion can be given to workers, and the remainder can be given to the kings/elites/capitalists/whatever. Unless you improve productivity, there isn't going to be magically more stuff to go around.
Giving each worker a car can plausibly increase their productivity (less time spent commuting?) but the effect is small, and unlikely to be recouped by car companies. The situation looks even worse in the current economy. If everyone's paychecks were 10% bigger, what marginal item do you think it'll be spent on? A bigger car? A new iPhone or big screen TV? How would any of those increase productivity?
> Suppose you're on an island where the economy only produces coconuts.
This is why nobody takes economists seriously. What you lose in simplifying down to this model is literally everything. The coconut economy has zero predictive power.
In the real world, distribution effects dramatically affect the functioning of the economy, because workers are also consumers and owners of capital are siphoning off the purchasing power of their customers. Productivity isn’t the question in the modern economy - we’re already massively overproducing just about everything - our problem is both our wealth and production allocations are borderline suicidal.
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This is how we had a major boom in middle-class wealth int he US post WW2.
If you are only selling coconuts, a single raw material, yes, you will run into supply constraints such that prices go up. But that isn't how economics works. Your zero-sum economics example is only applicable in short-term scenarios: over the longer term, new industries develop to solve persistent problems that people are willing to pay to solve.
Money solves the problems of the people that have the problems. If the problem is 'we need to eat', producers will diversify into new food sources to meet the demand, solving the problem, and capturing the money of the people who have that problem.
There is an enormous space of problems people have which cannot be solved due to lack of access to money. Increasing costs in childcare, elder care, and education are good examples.
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Wasn't the idea to give people more money (i.e. higher wages) so they could buy more cars/coconuts/etc? That's different than just directly "paying" them in the goods.
So in your simplified coconut economy, you'd at least have to keep two distinct kinds of entities, the goods to be paid and the payment. You sort of replaced both with coconuts and concluded the resulting system wouldn't work.
If the economy is 100% coconuts — all supply is coconuts, all demand is coconuts — then coconuts are all. Business owners sell coconuts in exchange for coconuts in order to acquire more coconuts. Employees are paid in coconuts which they trade for more coconuts. Paying workers more coconuts gives them more of what they want, which is coconuts, that they turn around and spend on coconuts.
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> Does this actually work?
Higher wages means workers and businesses have to be more effective. So more goods and services are produced and available. It's not a zero-sum game.
"But workers are already as effective as they can be"
Great, in that case you have the margins to pay higher wages.
A high wage / high cost society is great for workers and for businesses which actually do real work and produce real goods and services. It's not great for everybody else. Ie those who don't work, and businesses who doesn't make a high contribution.
Let's say you skewed income distribution a bit more like 1950s US, when high marginal tax rates resulted in more equal distribution of revenue through mechanisms like deductions or simply not taking that extra bump from 3 to 4 million. Now the upper 1% has lower income, but they were already mostly not-limited in purchasing power by their income. The upper 5-10% gets more. They go out to eat more, etc, etc.
We tried that experiment after passing "soak the rich" taxes in the early 20th century, and it seemed to work out pretty well for economic growth and living standards. But then we moved back towards "let there be oligarchs with immense wealth" instead. One of the claims was that the "investments" from allowing the powerful to keep most of the revenue streams for themselves would foster enough development to make it more than worthwhile, but instead... the broad base of consumer spending power has tanked, so businesses to supply the masses haven't found spending power to justify new investment/development outside of ad-powered ones participating in an arms race for the constricting consumer spending power that remains (or those industries benefiting from wildly subsidized-in-weird-ways spending like healthcare/pharma). And so it has also inflated asset classes across the board as there aren't enough startup ideas to eat up all the investments because of the general decline in spending power. Which hurts spending power further. (IMO the ability to capture higher and higher amounts of corporate profits as personal income also correlates to the massive financialization, outsourcing, and other short-term number-juicing moves we've seen.)
We can point to a lot of problems that have occurred from taking revenue shares away from the average worker, so it shouldn't be rocket science to think that returning a greater share of revenue to workers would return some purchasing power and guide the economy back towards development and growth instead of zero-sum asset bubbles.
Is there? Covid stimulus would say there isn't. Granted a company raising wages doesn't print money out of air like the Fed but the amount of goods doesn't change, the cost of the goods adjusts to the monetary supply. You now pay more for the same.
The Covid stimulus that prevented a huge wave of unemployment in more industries beyond travel and hospitality while inflation remained quite low for the calendar year following March 2020?
Or are you blaming the 2020-and-2021 stimulus for the 2021-through-2023 bullwhip-effect predictable-yet-not-mitigated inflation as things re-opened and demand returned for stuff we'd ramped down supply chains for? While chasing stupid obviously-not-permanent-change trends like Peloton stock instead?
Look at how much of the country lives paycheck-to-paycheck, and the income limits of the stimulus checks - how can you connect those people getting immediate money in 2020 or early 2021 to inflation at the end of 2022?
I didn't even get Covid stimulus checks and yet I also spent way more in 2021 and 2022 and 2023 on a lot of categories of goods than I did in 2020. Cause I went outside and did things more.
> the economics never works out if you do the math
The economics work out pretty well if you are the only game in town where your employees can purchase what you have marketed to be the next big thing and status symbol that everyone must have.
The idea is to use that as a marketing ploy on all sides.
On one side, paying high wages is marketing on the employment market - enticing people to work at Ford's rather than somewhere else.
Then, you got the government side. A factory providing a town with a lot of high quality employment leads to a lot of purchasing power from the employees and thus to a growing city. Wolfsburg in Germany, the best example, literally was founded by/for Volkswagen. Being respected by local politics for that growth, in turn, leads politicians and city management to... be lenient in enforcing regulations impeding the business. The best example here is Tesla in Brandenburg near Berlin. With any other company in any other place in Germany, they would get hammered with fines. Tesla in turn set up shop in a destitute area, so politicians bent over backwards and looked aside despite numerous violations and transgressions.
And finally, you got the customer side. The story of a quality product, made by well-paid domestic workers, was as powerful a story as it still is today, at least in affluent circles.
If you're a market leader it might make sense to use your influence to try pushing the whole market against the per-firm incentive gradient to a better equilibrium. Factors that help:
- You're an early player using new technology so you have profits to spare
- You're in a capital intensive business so salaries are a relatively small portion of your expenses
- You have a celebrity CEO so investors give them more of a "pass" for visionary ideas that go against conventional wisdom
I'm not an expert on the history of the US auto industry but my gut feeling is that all of these applied to Henry Ford's Ford.
Obviously this would never work with a single employer. But I think the point is moreso that if every employer, in an altruistic sense, decided to pay their employees enough to afford more purchasing power, the entire market would grow faster
Your logic is flawed. 8.8% of total wages vs 0% of some lesser number isn’t 8.8% of the difference.
If hypothetically you are paying 99x a year and bumping that to 100x means someone buys an 8.8x product that could be a win.
>If hypothetically you are paying 99x a year and bumping that to 100x means someone buys an 8.8x product that could be a win.
What type of company would this work for? Cars are so ingrained in our society that it's doubtful the marginal Ford (or Tesla) factory worker is going to be buying a $50k car just because they paid better wages.
A luxury car manufacturer could tip the scale of someone buying their product vs someone else’s product via an arbitrarily small wage increase.
The degree to which this is generalizable is of course a different story, but it’s at least theoretically possible for a small wage bump to be a net gain for the company.
The microeconomics of that decision are poor for the company, but the macroeconomics are great. But the macro angle has been reduced to "Fed interest rate" in America.
Why do you argue against paying people more when we are stuck in a society that increasingly fucks over workers with blithe logic and one-sided presentations of data?
Ok, so if he still makes a profit, so what? There are numerous other advantages to a happy and well-compensated workforce, even completely ignoring the societal benefits beyond just the company.