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Thursday, June 14, 2012

What do Henry Ford & Joseph Stiglitz have in common?

Henry Ford was a leading industrialist, perhaps THE leading industrialist, of the early 20th century.

Joseph Stiglitz is a current leading economist, and a winner of the Nobel Prize in economics.

Here's what they have in common:  They both recognized that, in order for the society as a whole to be a prosperous one, the common person needs to have much more than a subsistence income.  It's pretty simple, really.  If most people are broke, who's gonna buy the products of industry?  In order to sell lots of cars & washing machines & insurance policies, lots of people need to have money to spend.  If only the rich have extra money, well, there are not very many of them, so you can sell only a much smaller number of these items.

Ford came upon this principle early in the rise of the Ford Motor Company.  Through innovations in assembly line production of automobiles, the company rapidly increased the number of cars they were able to produce each week.  When this number was small, Ford had no trouble selling all of them, because his car was very practical, and his prices were lower than his competitors.  But as his output rose, eventually there came a time when there just weren't enough buyers that could afford a car.  This was at a time when most people earned just enough money for the basic necessities, which did not include a car.  Ford then began to pay his employees a lot more than the prevailing wage at the time.  This had multiple effects.  It got him the most qualified employees available, and an endless supply of them, so that he was able to continue to expand his factories and his production.  It also caused an economic boom in the Detroit area because of all of the money that Ford's employees were spending in all of the common types of businesses.  The well-know multiplier effect was in operation here; most of the businesses in the Detroit area prospered, and this caused even more spending.  Furthermore, other employers were forced to raise wages in order to prevent losing their employees to Ford.  Detroit became a boom town, with new residents flocking there, lots of cash being spent, and plenty of that going to buy new Ford cars.

This principle, of prosperity resulting from good wages for the common worker, has been known to economists ever since that time. The reason that Joseph Stiglitz is invoked here is because he recently wrote a book about it.  His book is entitled: "The Price of Inequality: How Today's Divided Society Endangers Our Future."  It seems that in recent decades America has drifted away from this prosperity principle, as the common worker has been losing spending power, while the rich are getting richer.


  1. As Henry Ford told the other manufacturers who weren't happy about his raising wages far above the prevailing rate, he needed someone to be able to buy his automobiles.

  2. Such a simple concept would seem easy to grasp, disappointingly, it apparently is not. I believe the reason this concept is not understood is the lack of critical thinking skill by most people because of their lack of a science based education. Even the rich are lacking in this type of education. Another is the lack of empathy. Put the two together and one has what we presently experience.

  3. Presumably Ford could pay more because he had developed the most efficient method of production-----he was one of the inventors of mass production. So his cost of production was lower than others. However, now US manufacturers have to compete with those in Asia where wages and total costs are considerably lower. An American manufacturer that pays generous wages only fails faster. He certainly wont sell his products to Wallmart, where Americans shop because of the low prices, courtesy of Asia.

  4. That's only partly true, because there are quite a few areas in which the U.S. is more than competitive. But the fact that we import most consumer goods from China lends weight to your assertion. So what should be done about it? I remember the 50's and 60's when America was doing very, very well, and with very little international trade. So I think that globalization has not been of net benefit to the U.S., although it has greatly benefited much of the world outside our borders. My preference would be to begin to change our policies so that they benefit the common people of the U.S. more than the corporations.


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