According to this fallacy, Henry Ford raised wages so as to increase productivity
The “newspaper of record” trots out this economic fallacy: “Perhaps the most famous illustration of the benefits [of higher wages stoking the sputtering engine of economic growth] is the story of Henry Ford’s decision in 1914 to pay $5 a day to workers on his Model T assembly lines. He did it to increase production — he was paying a premium to maintain a reliable work force. The unexpected benefit was that Ford’s factory workers became Ford customers, too.”
Who says so? What is the evidence that he did this so as to increase productivity? His own claim? Why believe him?
Were his workers starving and feeble before this great generosity of his? Of course not. And, even if this were true, it by no means follows that this is the royal road to profits.
From an economic point of view, even if this were the result, it would have been in spite of this “decision” of his, not due to it.
The best estimate of productivity, indeed the only one, is actual wages paid.
Of course, there are always errors in any market comprised of flesh and blood human beings. But the incessant hunt for profits and to avoid losses ensures that there is a continually operating tendency for productivity and wages not to diverge too greatly.
In any case, if this Ford fable were true, as per The New York Times, it would undercut its support for minimum wage laws and organized labor. These would not be needed if we could rely on employers voluntarily paying increased wages so as to boost productivity.
As for enough to buy back the product, the people who sell burgers at fast-food restaurants can already easily afford to consume them as well.
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But what about the producers of airplanes, yachts and office towers? There is no way that the average individual employee can be able to purchase these pricey items.
Is this then yet another “market failure”? Hardly. The failure, rather, is one of logic. There is simply no earthly reason why those who work on a product should be able to purchase it, too.
Further, this fallacy is often used to buttress the minimum wage law. But even supposing that this is precisely why Ford practically doubled the wage he offered, that was a voluntary act on his part.
The minimum wage law, in sharp contrast, is a compulsory mandate, compelling all and sundry to go along with this enactment or suffer fine and even a jail sentence.
Just because one man doubled the remuneration he offered his staff with no negative aftereffects does not at all demonstrate that if this sort of thing becomes a legal requirement, no ill effects will ensue.
Rather, if the minimum wage level is approximately doubled from its present $7.25 to $15.00 per hour, all those with productivities below the latter level will soon enough be added to our unemployment rolls.
And what about the present enactment requiring that $7.25 be paid? This spells the death knell for the employment prospects of all those who cannot add that much, on an hourly basis, to the bottom line.
Get rid of this pernicious law, and the highly unskilled will also be able to earn an honest dollar.
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